[Title 12 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2014 Edition]
[From the U.S. Government Printing Office]



[[Page i]]

          

          Title 12

Banks and Banking


________________________

Parts 1 to 199

                         Revised as of January 1, 2014

          Containing a codification of documents of general 
          applicability and future effect

          As of January 1, 2014
                    Published by the Office of the Federal Register 
                    National Archives and Records Administration as a 
                    Special Edition of the Federal Register

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                            Table of Contents



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

  Title 12:
          Chapter I--Comptroller of the Currency, Department 
          of the Treasury                                            3
  Finding Aids:
      Table of CFR Titles and Chapters........................    1049
      Alphabetical List of Agencies Appearing in the CFR......    1069
      List of CFR Sections Affected...........................    1079

[[Page iv]]


      


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

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

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

[[Page v]]



                               EXPLANATION

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

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

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

LEGAL STATUS

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
issues of the Federal Register. These two publications must be used 
together to determine the latest version of any given rule.
    To determine whether a Code volume has been amended since its 
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Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative 
List of Parts Affected,'' which appears in the Reader Aids section of 
the daily Federal Register. These two lists will identify the Federal 
Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

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Register since the last revision of that volume of the Code. Source 
citations for the regulations are referred to by volume number and page 
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inserted following the text.

OMB CONTROL NUMBERS

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

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
amendments to existing regulations in the CFR. These OMB numbers are 
placed as close as possible to the applicable recordkeeping or reporting 
requirements.

PAST PROVISIONS OF THE CODE

    Provisions of the Code that are no longer in force and effect as of 
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``[RESERVED]'' TERMINOLOGY

    The term ``[Reserved]'' is used as a place holder within the Code of 
Federal Regulations. An agency may add regulatory information at a 
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editorially to indicate that a portion of the CFR was left vacant and 
not accidentally dropped due to a printing or computer error.

INCORPORATION BY REFERENCE

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established by statute and allows Federal agencies to meet the 
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This material, like any other properly issued regulation, has the force 
of law.
    What is a proper incorporation by reference? The Director of the 
Federal Register will approve an incorporation by reference only when 
the requirements of 1 CFR part 51 are met. Some of the elements on which 
approval is based are:
    (a) The incorporation will substantially reduce the volume of 
material published in the Federal Register.
    (b) The matter incorporated is in fact available to the extent 
necessary to afford fairness and uniformity in the administrative 
process.
    (c) The incorporating document is drafted and submitted for 
publication in accordance with 1 CFR part 51.
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this volume.

[[Page vii]]

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    Charles A. Barth,
    Director,
    Office of the Federal Register.
    January 1, 2014.

                                
                                      
                            

  

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                               THIS TITLE

    Title 12--Banks and Banking is composed of eight volumes. The parts 
in these volumes are arranged in the following order: Parts 1-199, 200-
219, 220-229, 230-299, 300-499, 500-599, part 600-899, and 900-end. The 
first volume containing parts 1-199 is comprised of chapter I--
Comptroller of the Currency, Department of the Treasury. The second, 
third and fourth volumes containing parts 200-299 are comprised of 
chapter II--Federal Reserve System. The fifth volume containing parts 
300-499 is comprised of chapter III--Federal Deposit Insurance 
Corporation and chapter IV--Export-Import Bank of the United States. The 
sixth volume containing parts 500-599 is comprised of chapter V--Office 
of Thrift Supervision, Department of the Treasury. The seventh volume 
containing parts 600-899 is comprised of chapter VI--Farm Credit 
Administration, chapter VII--National Credit Union Administration, 
chapter VIII--Federal Financing Bank. The eighth volume containing part 
900-end is comprised of chapter IX--Federal Housing Finance Board, 
chapter XI--Federal Financial Institutions Examination Council, chapter 
XIV--Farm Credit System Insurance Corporation, chapter XV--Department of 
the Treasury, chapter XVII--Office of Federal Housing Enterprise 
Oversight, Department of Housing and Urban Development and chapter 
XVIII--Community Development Financial Institutions Fund, Department of 
the Treasury. The contents of these volumes represent all of the current 
regulations codified under this title of the CFR as of January 1, 2014.

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

[[Page 1]]



                       TITLE 12--BANKS AND BANKING




                   (This book contains parts 1 to 199)

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

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

[[Page 3]]



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




  --------------------------------------------------------------------
Part                                                                Page
1               Investment securities.......................           7
2               Sales of credit life insurance..............          14
3               Capital adequacy standards..................          15
4               Organization and functions, availability and 
                    release of information, contracting 
                    outreach program, post-employment 
                    restrictions for senior examiners.......         259
5               Rules, policies, and procedures for 
                    corporate activities....................         283
6               Prompt corrective action....................         337
7               Bank activities and operations..............         348
8               Assessment of fees..........................         370
9               Fiduciary activities of national banks......         376
10              Municipal securities dealers................         389
11              Securities Exchange Act disclosure rules....         389
12              Recordkeeping and confirmation requirements 
                    for securities transactions.............         391
13              Government securities sales practices.......         398
14              Consumer protection in sales of insurance...         401
15              [Reserved]

16              Securities offering disclosure rules........         405
18              Disclosure of financial and other 
                    information by national banks...........         411
19              Rules of practice and procedure.............         414
21              Minimum security devices and procedures, 
                    reports of suspicious activities, and 
                    Bank Secrecy Act Compliance Program.....         455
22              Loans in areas having special flood hazards.         460
23              Leasing.....................................         464
24              Community and economic development entities, 
                    community development projects, and 
                    other public welfare investments........         467
25              Community Reinvestment Act and interstate 
                    deposit production regulations..........         477
26              Management official interlocks..............         500

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27              Fair housing home loan data system..........         504
28              International banking activities............         515
29              [Reserved]

30              Safety and soundness standards..............         529
31              Extensions of credit to insiders and 
                    transactions with affiliates............         543
32              Lending limits..............................         547
33              [Reserved]

34              Real estate lending and appraisals..........         569
35              Disclosure and reporting of CRA-related 
                    agreements..............................         602
36              [Reserved]

37              Debt cancellation contracts and debt 
                    suspension agreements...................         614
38-39           [Reserved]

40              Privacy of consumer financial information...         619
41              Fair credit reporting.......................         647
42-45           [Reserved]

46              Annual stress test..........................         680
47              [Reserved]

48              Retail foreign exchange transactions........         684
49-99           [Reserved]

100             Rules applicable to savings associations....         698
101-107         [Reserved]

108             Removals, suspensions, and prohibitions 
                    where a crime is charged or proven......         698
109             Rules of practice and procedure in 
                    adjudicatory proceedings................         701
110-111         [Reserved]

112             Rules for investigative proceedings and 
                    formal examination proceedings..........         724
113-115         [Reserved]

116             Application processing procedures...........         726
117-127         [Reserved]

128             Nondiscrimination requirements..............         736
129-132         [Reserved]

133             Disclosure and reporting of CRA-related 
                    agreements..............................         741
134-135         [Reserved]

136             Consumer protection in sales of insurance...         753
137-140         [Reserved]

141             Definitions for regulations affecting 
                    Federal savings associations............         757
142             [Reserved]

143             Federal mutual savings associations--
                    incorporation, organization, and 
                    conversion..............................         759
144             Federal mutual savings associations--charter 
                    and bylaws..............................         766

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145             Federal savings associations--operations....         773
146             Federal mutual savings associations--merger, 
                    dissolution, reorganization, and 
                    conversion..............................         778
147-149         [Reserved]

150             Fiduciary powers of Federal savings 
                    associations............................         780
151             Recordkeeping and confirmation requirements 
                    for securities transactions.............         791
152             Federal stock associations--incorporation, 
                    organization, and conversion............         799
153-154         [Reserved]

155             Electronic operations.......................         818
156             [Reserved]

157             Deposits....................................         819
158             [Reserved]

159             Subordinate organizations...................         820
160             Lending and investment......................         827
161             Definitions for regulations affecting all 
                    savings associations....................         845
162             Regulatory reporting standards..............         851
163             Savings associations--operations............         852
164             Appraisals..................................         878
165             Prompt corrective action....................         883
166             [Reserved]

167             Capital.....................................         886
168             Security procedures.........................         920
169             Proxies.....................................         921
170             Safety and soundness guidelines and 
                    compliance procedures...................         922
171             Fair credit reporting.......................         936
172             Loans in areas having special flood hazards.         942
173             [Reserved]

174             Acquisition of control of Federal savings 
                    associations............................         946
175-189         [Reserved]

190             Preemption of State usury laws..............         961
191             Preemption of State due-on-sale laws........         966
192             Conversions from mutual to stock form.......         970
193             Accounting requirements.....................         998
194             Securities of Federal savings associations..        1007
195             Community reinvestment......................        1009
196             Management official interlocks..............        1032
197             Securities offerings........................        1037
198-199         [Reserved]

[[Page 7]]



PART 1_INVESTMENT SECURITIES--Table of Contents



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

                             Interpretations

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

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

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



Sec. 1.1  Authority, purpose, scope, and reservation of authority.

    (a) Authority. This part is issued pursuant to 12 U.S.C. 1 et seq., 
12 U.S.C. 24 (Seventh), and 12 U.S.C. 93a.
    (b) Purpose This part prescribes standards under which national 
banks may purchase, sell, deal in, underwrite, and hold securities, 
consistent with the authority contained in 12 U.S.C. 24 (Seventh) and 
safe and sound banking practices.
    (c) Scope.The standards set forth in this part apply to national 
banks and Federal branches of foreign banks.Further, pursuant to 12 
U.S.C. 335, State banks that are members of the Federal Reserve System 
are subject to the same limitations and conditions that apply to 
national banks in connection with purchasing, selling, dealing in, and 
underwriting securities and stock. In addition to activities authorized 
under this part, foreign branches of national banks are authorized to 
conduct international activities and invest in securities pursuant to 12 
CFR part 211.
    (d) Reservation of authority. The OCC may determine, on a case-by-
case basis, that a national bank may acquire an investment security 
other than an investment security of a type set forth in this part, 
provided the OCC determines that the bank's investment is consistent 
with 12 U.S.C. section 24 (Seventh) and with safe and sound banking 
practices. The OCC will consider all relevant factors, including the 
risk characteristics of the particular investment in comparison with the 
risk characteristics of investments that the OCC has previously 
authorized, and the bank's ability effectively to manage such risks. The 
OCC may impose limits or conditions in connection with approval of an 
investment security under this subsection. Investment securities that 
the OCC determines are permissible in accordance with this paragraph 
constitute eligible investments for purposes of 12 U.S.C. 24.

[61 FR 63982, Dec. 2, 1996, as amended at 73 FR 22235, Apr. 24, 2008]



Sec. 1.2  Definitions.

    (a) Capital and surplus means:
    (1) A bank's Tier 1 and Tier 2 capital calculated under the OCC's 
risk-based capital standards set forth in appendix A to 12 CFR part 3 
(or comparable capital guidelines of the appropriate Federal banking 
agency) as reported in the bank's Consolidated Report of Condition and 
Income filed under 12 U.S.C. 161 (or under 12 U.S.C. 1817 in the case of 
a state member bank); plus
    (2) The balance of a bank's allowance for loan and lease losses not 
included in the bank's Tier 2 capital, for purposes of the calculation 
of risk-based capital described in paragraph (a)(1) of this section, as 
reported in the bank's Consolidated Report of Condition and Income filed 
under 12 U.S.C. 161 (or under 12 U.S.C. 1817 in the case of a state 
member bank).
    (b) General obligation of a State or political subdivision means:
    (1) An obligation supported by the full faith and credit of an 
obligor possessing general powers of taxation, including property 
taxation; or
    (2) An obligation payable from a special fund or by an obligor not 
possessing general powers of taxation,

[[Page 8]]

when an obligor possessing general powers of taxation, including 
property taxation, has unconditionally promised to make payments into 
the fund or otherwise provide funds to cover all required payments on 
the obligation.
    (c) Investment company means an investment company, including a 
mutual fund, registered under section 8 of the Investment Company Act of 
1940, 15 U.S.C. 80a-8.
    (d) Investment grade means the issuer of a security has an adequate 
capacity to meet financial commitments under the security for the 
projected life of the asset or exposure. An issuer has an adequate 
capacity to meet financial commitments if the risk of default by the 
obligor is low and the full and timely repayment of principal and 
interest is expected.
    (e) Investment security means a marketable debt obligation that is 
investment grade and not predominately speculative in nature.
    (f) Marketable means that the security:
    (1) Is registered under the Securities Act of 1933, 15 U.S.C. 77a et 
seq.;
    (2) Is a municipal revenue bond exempt from registration under the 
Securities Act of 1933, 15 U.S.C. 77c(a)(2);
    (3) Is offered and sold pursuant to Securities and Exchange 
Commission Rule 144A, 17 CFR 230.144A, and investment grade; or
    (4) Can be sold with reasonable promptness at a price that 
corresponds reasonably to its fair value.
    (g) Municipal bonds means obligations of a State or political 
subdivision other than general obligations, and includes limited 
obligation bonds, revenue bonds, and obligations that satisfy the 
requirements of section 142(b)(1) of the Internal Revenue Code of 1986 
issued by or on behalf of any State or political subdivision of a State, 
including any municipal corporate instrumentality of 1 or more States, 
or any public agency or authority of any State or political subdivision 
of a State.
    (h) [Reserved]
    (i) Political subdivision means a county, city, town, or other 
municipal corporation, a public authority, and generally any publicly-
owned entity that is an instrumentality of a State or of a municipal 
corporation.
    (j) Type I security means:
    (1) Obligations of the United States;
    (2) Obligations issued, insured, or guaranteed by a department or an 
agency of the United States Government, if the obligation, insurance, or 
guarantee commits the full faith and credit of the United States for the 
repayment of the obligation;
    (3) Obligations issued by a department or agency of the United 
States, or an agency or political subdivision of a State of the United 
States, that represent an interest in a loan or a pool of loans made to 
third parties, if the full faith and credit of the United States has 
been validly pledged for the full and timely payment of interest on, and 
principal of, the loans in the event of non-payment by the third party 
obligor(s);
    (4) General obligations of a State of the United States or any 
political subdivision thereof; and municipal bonds if the national bank 
is well capitalized as defined in 12 CFR 6.4(b)(1);
    (5) Obligations authorized under 12 U.S.C. 24 (Seventh) as 
permissible for a national bank to deal in, underwrite, purchase, and 
sell for the bank's own account, including qualified Canadian government 
obligations; and
    (6) Other securities the OCC determines to be eligible as Type I 
securities under 12 U.S.C. 24 (Seventh).
    (k) Type II security means an investment security that represents:
    (1) Obligations issued by a State, or a political subdivision or 
agency of a State, for housing, university, or dormitory purposes that 
would not satisfy the definition of Type I securities pursuant to 
paragraph (j) of Sec. 1.2;
    (2) Obligations of international and multilateral development banks 
and organizations listed in 12 U.S.C. 24 (Seventh);
    (3) Other obligations listed in 12 U.S.C. 24 (Seventh) as 
permissible for a bank to deal in, underwrite, purchase, and sell for 
the bank's own account, subject to a limitation per obligor of 10 
percent of the bank's capital and surplus; and
    (4) Other securities the OCC determines to be eligible as Type II 
securities under 12 U.S.C. 24 (Seventh).
    (l) Type III security means an investment security that does not 
qualify as

[[Page 9]]

a Type I, II, IV, or V security. Examples of Type III securities include 
corporate bonds and municipal bonds that do not satisfy the definition 
of Type I securities pursuant to paragraph (j) of Sec. 1.2 or the 
definition of Type II securities pursuant to paragraph (k) of Sec. 1.2.
    (m) Type IV security means:
    (1) A small business-related security as defined in section 
3(a)(53)(A) of the Securities Exchange Act of 1934, 15 U.S.C. 
78c(a)(53)(A), that is fully secured by interests in a pool of loans to 
numerous obligors.
    (2) A commercial mortgage-related security that is offered or sold 
pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C. 
77d(5), that is investment grade, or a commercial mortgage-related 
security as described in section 3(a)(41) of the Securities Exchange Act 
of 1934, 15 U.S.C. 78c(a)(41), that represents ownership of a promissory 
note or certificate of interest or participation that is directly 
secured by a first lien on one or more parcels of real estate upon which 
one or more commercial structures are located and that is fully secured 
by interests in a pool of loans to numerous obligors.
    (3) A residential mortgage-related security that is offered and sold 
pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C. 
77d(5), that is investment grade, or a residential mortgage-related 
security as described in section 3(a)(41) of the Securities Exchange Act 
of 1934, 15 U.S.C. 78c(a)(41)) that does not otherwise qualify as a Type 
I security.
    (n) Type V security means a security that is:
    (1) Investment grade;
    (2) Marketable;
    (3) Not a Type IV security; and
    (4) Fully secured by interests in a pool of loans to numerous 
obligors and in which a national bank could invest directly.

[61 FR 63982, Dec. 2, 1996, as amended at 66 FR 34791, July 2, 2001; 77 
FR 35257, June 13, 2012]



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

    (a) Type I securities. A national bank may deal in, underwrite, 
purchase, and sell Type I securities for its own account. The amount of 
Type I securities that the bank may deal in, underwrite, purchase, and 
sell is not limited to a specified percentage of the bank's capital and 
surplus.
    (b) Type II securities. A national bank may deal in, underwrite, 
purchase, and sell Type II securities for its own account, provided the 
aggregate par value of Type II securities issued by any one obligor held 
by the bank does not exceed 10 percent of the bank's capital and 
surplus. In applying this limitation, a national bank shall take account 
of Type II securities that the bank is legally committed to purchase or 
to sell in addition to the bank's existing holdings.
    (c) Type III securities. A national bank may purchase and sell Type 
III securities for its own account, provided the aggregate par value of 
Type III securities issued by any one obligor held by the bank does not 
exceed 10 percent of the bank's capital and surplus. In applying this 
limitation, a national bank shall take account of Type III securities 
that the bank is legally committed to purchase or to sell in addition to 
the bank's existing holdings.
    (d) Type II and III securities; other investment securities 
limitations. A national bank may not hold Type II and III securities 
issued by any one obligor with an aggregate par value exceeding 10 
percent of the bank's capital and surplus. However, if the proceeds of 
each issue are to be used to acquire and lease real estate and related 
facilities to economically and legally separate industrial tenants, and 
if each issue is payable solely from and secured by a first lien on the 
revenues to be derived from rentals paid by the lessee under net 
noncancellable leases, the bank may apply the 10 percent investment 
limitation separately to each issue of a single obligor.
    (e) Type IV securities. A national bank may purchase and sell Type 
IV securities for its own account. The amount of the Type IV securities 
that a bank may purchase and sell is not limited to a specified 
percentage of the bank's capital and surplus.
    (f) Type V securities. A national bank may purchase and sell Type V 
securities for its own account provided that

[[Page 10]]

the aggregate par value of Type V securities issued by any one issuer 
held by the bank does not exceed 25 percent of the bank's capital and 
surplus. In applying this limitation, a national bank shall take account 
of Type V securities that the bank is legally committed to purchase or 
to sell in addition to the bank's existing holdings.
    (g) Securitization. A national bank may securitize and sell assets 
that it holds, as a part of its banking business. The amount of 
securitized loans and obligations that a bank may sell is not limited to 
a specified percentage of the bank's capital and surplus.
    (h) Pooled investments--(1) General. A national bank may purchase 
and sell for its own account investment company shares provided that:
    (i) The portfolio of the investment company consists exclusively of 
assets that the national bank may purchase and sell for its own account; 
and
    (ii) The bank's holdings of investment company shares do not exceed 
the limitations in Sec. 1.4(e).
    (2) Other issuers. The OCC may determine that a national bank may 
invest in an entity that is exempt from registration as an investment 
company under section 3(c)(1) of the Investment Company Act of 1940, 
provided that the portfolio of the entity consists exclusively of assets 
that a national bank may purchase and sell for its own account.
    (3) Investments made under this paragraph (h) must comply with 
Sec. 1.5 of this part, conform with applicable published OCC precedent, 
and must be:
    (i) Marketable and investment grade, or
    (ii) Satisfy the requirements of Sec. 1.3(i).
    (i) Securities held based on estimates of obligor's performance. (1) 
Notwithstanding Secs. 1.2(d) and (e), a national bank may treat a debt 
security as an investment security for purposes of this part if the 
security is marketable and the bank concludes, on the basis of estimates 
that the bank reasonably believes are reliable, that the obligor will be 
able to satisfy its obligations under that security.
    (2) The aggregate par value of securities treated as investment 
securities under paragraph (i)(1) of this section may not exceed 5 
percent of the bank's capital and surplus.

[61 FR 63982, Dec. 2, 1996, as amended at 64 FR 60098, Nov. 4, 1999; 73 
FR 22235, Apr. 24, 2008; 77 FR 35257, June 13, 2012]



Sec. 1.4  Calculation of limits.

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

[[Page 11]]

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



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

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



Sec. 1.6  Convertible securities.

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



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

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



Sec. 1.8  Nonconforming investments.

    (a) A national bank's investment in securities that no longer 
conform to this part but conformed when made

[[Page 12]]

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

                             Interpretations



Sec. 1.100  Indirect general obligations.

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



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

    (a) An obligation is considered supported by the full faith and 
credit of a State or political subdivision possessing general powers of 
taxation

[[Page 13]]

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



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

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



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

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

[[Page 14]]

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



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



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

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

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



Sec. 2.1  Authority, purpose, and scope.

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



Sec. 2.2  Definitions.

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

[61 FR 51781, Oct. 4, 1996, as amended at 73 FR 22235, Apr. 24, 2008]



Sec. 2.3  Distribution of credit life insurance income.

    (a) Distribution of credit life insurance income by a national bank 
must be consistent with the requirements and principles of this section.
    (b) It is an unsafe and unsound practice for any director, officer, 
employee, or principal shareholder of a national bank (including any 
entity in which this person owns an interest of more than ten percent), 
who is involved in the sale of credit life insurance to loan customers 
of the national bank, to take advantage of that business opportunity for 
personal profit. Recommendations to customers to buy insurance should be 
based on the benefits of the policy, not the commissions received from 
the sale.

[[Page 15]]

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



Sec. 2.4  Bonus and incentive plans.

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



Sec. 2.5  Bank compensation.

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



PART 3_CAPITAL ADEQUACY STANDARDS--Table of Contents



                      Subpart A_General Provisions

Sec.
3.1  Purpose, applicability, reservations of authority, and timing.
3.2   Definitions.
3.3   Operational requirements for certain exposures.
3.4-3.9  [Reserved]

            Subpart B_Capital Ratio Requirements and Buffers

3.10  Minimum capital requirements.
3.11  Capital conservation buffer and countercyclical capital buffer 
          amount.
3.12-3.19  [Reserved]

                     Subpart C_Definition of Capital

3.20  Capital components and eligibility criteria for regulatory capital 
          instruments.
3.21  Minority interest.
3.22  Regulatory capital adjustments and deductions.
3.23-3.29  [Reserved]

          Subpart D_Risk-weighted Assets_Standardized Approach

3.30  Applicability.

              Risk-Weighted Assets for General Credit Risk

3.31  Mechanics for calculating risk-weighted assets for general credit 
          risk.
3.32  General risk weights.
3.33  Off-balance sheet exposures.
3.34  OTC derivative contracts.
3.35  Cleared transactions.
3.36  Guarantees and credit derivatives: Substitution treatment.
3.37  Collateralized transactions.

             Risk-Weighted Assets for Unsettled Transactions

3.38  Unsettled transactions.
3.39-3.40  [Reserved]

            Risk-Weighted Assets for Securitization Exposures

3.41  Operational requirements for securitization exposures.

[[Page 16]]

3.42  Risk-weighted assets for securitization exposures.
3.43  Simplified supervisory formula approach (SSFA) and the gross-up 
          approach.
3.44  Securitization exposures to which the SSFA and gross-up approach 
          do not apply.
3.45  Recognition of credit risk mitigants for securitization exposures.
3.46-3.50  [Reserved]

                Risk-Weighted Assets for Equity Exposures

3.51  Introduction and exposure measurement.
3.52  Simple risk-weight approach (SRWA).
3.53  Equity exposures to investment funds.
3.54-3.60  [Reserved]

                               Disclosures

3.61  Purpose and scope.
3.62  Disclosure requirements.
3.63  Disclosures by national banks or Federal savings associations 
          described in Sec. 3.61.
3.64-3.99  [Reserved]

   Subpart E_Risk-Weighted Assets_Internal Ratings-Based and Advanced 
                         Measurement Approaches

3.100  Purpose, applicability, and principle of conservatism.
3.101  Definitions.
3.102-3.120  [Reserved]

                              Qualification

3.121  Qualification process.
3.122  Qualification requirements.
3.123  Ongoing qualification.
3.124  Merger and acquisition transitional arrangements.
3.125-3.130  [Reserved]

              Risk-Weighted Assets For General Credit Risk

3.131   Mechanics for calculating total wholesale and retail risk-
          weighted assets.
3.132   Counterparty credit risk of repo-style transactions, eligible 
          margin loans, and OTC derivative contracts.
3.133   Cleared transactions.
3.134   Guarantees and credit derivatives: PD substitution and LGD 
          adjustment approaches.
3.135   Guarantees and credit derivatives: Double default treatment.
3.136   Unsettled transactions.
3.137-3.140  [Reserved]

            Risk-Weighted Assets for Securitization Exposures

3.141   Operational criteria for recognizing the transfer of risk.
3.142   Risk-weighted assets for securitization exposures.
3.143   Supervisory formula approach (SFA).
3.144   Simplified supervisory formula approach (SSFA).
3.145   Recognition of credit risk mitigants for securitization 
          exposures.
3.146-3.150  [Reserved]

                Risk-Weighted Assets For Equity Exposures

3.151   Introduction and exposure measurement.
3.152   Simple risk weight approach (SRWA).
3.153   Internal models approach (IMA).
3.154   Equity exposures to investment funds.
3.155   Equity derivative contracts.
3.166-3.160  [Reserved]

                Risk-Weighted Assets For Operational Risk

3.161   Qualification requirements for incorporation of operational risk 
          mitigants.
3.162   Mechanics of risk-weighted asset calculation.
3.163-3.170  [RESERVED]

                               Disclosures

3.171  Purpose and scope.
3.172  Disclosure requirements.
3.173  Disclosures by certain advanced approaches national banks and 
          Federal savings associations.
3.174-3.200  [Reserved]

               Subpart F_Risk-weighted Assets_Market Risk

3.201   Purpose, applicability, and reservation of authority.
3.202   Definitions.
3.203   Requirements for application of this subpart F.
3.204   Measure for market risk.
3.205   VaR-based measure.
3.206   Stressed VaR-based measure.
3.207   Specific risk.
3.208   Incremental risk.
3.209   Comprehensive risk.
3.210   Standardized measurement method for specific risk.
3.211   Simplified supervisory formula approach (SSFA).
3.212   Market risk disclosures.
3.213-3.299  [Reserved]

                     Subpart G_Transition Provisions

3.300   Transitions.

Subpart H_Establishment of Minimum Capital Ratios for an Individual Bank 
                or Individual Federal Savings Association

3.401  Purpose and scope.
3.402  Applicability.

[[Page 17]]

3.403  Standards for determination of appropriate individual minimum 
          capital ratios.
3.404  Procedures.
3.405  Relation to other actions.

                          Subpart I_Enforcement

3.501  Remedies.

                    Subpart J_Issuance of a Directive

3.601  Purpose and scope.
3.602  Notice of intent to issue a directive.
3.603  Response to notice.
3.604  Decision.
3.605  Issuance of a directive.
3.606  Change in circumstances.
3.607  Relation to other administrative actions.

                        Subpart K_Interpretations

3.701  Capital and surplus.

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

    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).

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



                      Subpart A_General Provisions

    Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted.



Sec. 3.1  Purpose, applicability, reservations of authority, and timing.

    (a) Purpose. This part establishes minimum capital requirements and 
overall capital adequacy standards for national banks or Federal savings 
associations. This part includes methodologies for calculating minimum 
capital requirements, public disclosure requirements related to the 
capital requirements, and transition provisions for the application of 
this part.
    (b) Limitation of authority. Nothing in this part shall be read to 
limit the authority of the OCC to take action under other provisions of 
law, including action to address unsafe or unsound practices or 
conditions, deficient capital levels, or violations of law or 
regulation, under section 8 of the Federal Deposit Insurance Act.
    (c) Applicability. Subject to the requirements in paragraphs (d) and 
(f) of this section:
    (1) Minimum capital requirements and overall capital adequacy 
standards. Each national bank or Federal savings association must 
calculate its minimum capital requirements and meet the overall capital 
adequacy standards in subpart B of this part.
    (2) Regulatory capital. Each national bank or Federal savings 
association must calculate its regulatory capital in accordance with 
subpart C of this part.
    (3) Risk-weighted assets. (i) Each national bank or Federal savings 
association must use the methodologies in subpart D of this part (and 
subpart F of this part for a market risk national bank or Federal 
savings association) to calculate standardized total risk-weighted 
assets.
    (ii) Each advanced approaches national bank or Federal savings 
association must use the methodologies in subpart E (and subpart F of 
this part for a market risk national bank or Federal savings 
association) to calculate advanced approaches total risk-weighted 
assets.
    (4) Disclosures. (i) Except for an advanced approaches national bank 
or Federal savings association that is making public disclosures 
pursuant to the requirements in subpart E of this part, each national 
bank or Federal savings association with total consolidated assets of 
$50 billion or more must make the public disclosures described in 
subpart D of this part.
    (ii) Each market risk national bank or Federal savings association 
must make the public disclosures described in subpart F of this part.
    (iii) Each advanced approaches national bank or Federal savings 
association must make the public disclosures described in subpart E of 
this part.
    (d) Reservation of authority--(1) Additional capital in the 
aggregate. The OCC may require a national bank or Federal savings 
association to hold an amount of regulatory capital greater than 
otherwise required under this part if the OCC determines that the 
national bank's or Federal savings association's capital requirements 
under this part

[[Page 18]]

are not commensurate with the national bank's or Federal savings 
association's credit, market, operational, or other risks.
    (2) Regulatory capital elements. (i) If the OCC determines that a 
particular common equity tier 1, additional tier 1, or tier 2 capital 
element has characteristics or terms that diminish its ability to absorb 
losses, or otherwise present safety and soundness concerns, the OCC may 
require the national bank or Federal savings association to exclude all 
or a portion of such element from common equity tier 1 capital, 
additional tier 1 capital, or tier 2 capital, as appropriate.
    (ii) Notwithstanding the criteria for regulatory capital instruments 
set forth in subpart C of this part, the OCC may find that a capital 
element may be included in a national bank's or Federal savings 
association's common equity tier 1 capital, additional tier 1 capital, 
or tier 2 capital on a permanent or temporary basis consistent with the 
loss absorption capacity of the element and in accordance with 
Sec. 3.20(e).
    (3) Risk-weighted asset amounts. If the OCC determines that the 
risk-weighted asset amount calculated under this part by the national 
bank or Federal savings association for one or more exposures is not 
commensurate with the risks associated with those exposures, the OCC may 
require the national bank or Federal savings association to assign a 
different risk-weighted asset amount to the exposure(s) or to deduct the 
amount of the exposure(s) from its regulatory capital.
    (4) Total leverage. If the OCC determines that the leverage exposure 
amount, or the amount reflected in the national bank's or Federal 
savings association's reported average total consolidated assets, for an 
on- or off-balance sheet exposure calculated by a national bank or 
Federal savings association under Sec. 3.10 is inappropriate for the 
exposure(s) or the circumstances of the national bank or Federal savings 
association, the OCC may require the national bank or Federal savings 
association to adjust this exposure amount in the numerator and the 
denominator for purposes of the leverage ratio calculations.
    (5) Consolidation of certain exposures. The OCC may determine that 
the risk-based capital treatment for an exposure or the treatment 
provided to an entity that is not consolidated on the national bank's or 
Federal savings association's balance sheet is not commensurate with the 
risk of the exposure and the relationship of the national bank or 
Federal savings association to the entity. Upon making this 
determination, the OCC may require the national bank or Federal savings 
association to treat the exposure or entity as if it were consolidated 
on the balance sheet of the national bank or Federal savings association 
for purposes of determining the national bank's or Federal savings 
association's risk-based capital requirements and calculating the 
national bank's or Federal savings association's risk-based capital 
ratios accordingly. The OCC will look to the substance of, and risk 
associated with, the transaction, as well as other relevant factors the 
OCC deems appropriate in determining whether to require such treatment.
    (6) Other reservation of authority. With respect to any deduction or 
limitation required under this part, the OCC may require a different 
deduction or limitation, provided that such alternative deduction or 
limitation is commensurate with the national bank's or Federal savings 
association's risk and consistent with safety and soundness.
    (e) Notice and response procedures. In making a determination under 
this section, the OCC will apply notice and response procedures in the 
same manner as the notice and response procedures in Sec. 3.404.
    (f) Timing. (1) Subject to the transition provisions in subpart G of 
this part, an advanced approaches national bank or Federal savings 
association that is not a savings and loan holding company must:
    (i) Except as described in paragraph (f)(1)(ii) of this section, 
beginning on January 1, 2014, calculate advanced approaches total risk-
weighted assets in accordance with subpart E and, if applicable, subpart 
F of this part and, beginning on January 1, 2015, calculate standardized 
total risk-weighted assets in accordance with subpart D and, if 
applicable, subpart F of this part;

[[Page 19]]

    (ii) From January 1, 2014 to December 31, 2014:
    (A) Calculate risk-weighted assets in accordance with the general 
risk-based capital rules under appendix A to this part and, if 
applicable, subpart F of this part (national banks), or 12 CFR part 167 
and, if applicable, subpart F of this part (Federal savings 
associations) \1\ and substitute such risk-weighted assets for 
standardized total risk-weighted assets for purposes of Sec. 3.10;
---------------------------------------------------------------------------

    \1\ For the purpose of calculating its general risk-based capital 
ratios from January 1, 2014 to December 31, 2014, an advanced approaches 
national bank or Federal savings association shall adjust, as 
appropriate, its risk-weighted asset measure (as that amount is 
calculated under appendix A to this part, Sec. 3 and, if applicable, 
subpart F of this part (national banks), or 12 CFR part 167 and, if 
applicable, subpart F of this part (Federal savings associations) in the 
general risk-based capital rules) by excluding those assets that are 
deducted from its regulatory capital under Sec. 3.22.
---------------------------------------------------------------------------

    (B) If applicable, calculate general market risk equivalent assets 
in accordance with appendix B to this part, section 4(a)(3) (national 
banks) and substitute such general market risk equivalent assets for 
standardized market risk-weighted assets for purposes of 
Sec. 3.20(d)(3); and
    (C) Substitute the corresponding provision or provisions of appendix 
A to this part, and, if applicable, appendix B to this part (national 
banks), or 12 CFR part 167 (Federal savings associations) for any 
reference to subpart D of this part in: Sec. 3.121(c); Sec. 3.124(a) and 
(b); Sec. 3.144(b); Sec. 3.154(c) and (d); Sec. 3.202(b) (definition of 
covered position in paragraph (b)(3)(iv)); and Sec. 3.211(b);\2\
---------------------------------------------------------------------------

    \2\ In addition, for purposes of Sec. 3.201(c)(3), from January 1, 
2014 to December 31, 2014, for any circumstance in which the OCC may 
require a national bank or Federal savings association to calculate 
risk-based capital requirements for specific positions or portfolios 
under subpart D of this part, the OCC will instead require the national 
bank or Federal savings association to make such calculations according 
to appendix A to this part and, if applicable, subpart F of this part 
(national banks), or 12 CFR part 167 and, if applicable, subpart F of 
this part (Federal savings associations).
---------------------------------------------------------------------------

    (iii) Beginning on January 1, 2014, calculate and maintain minimum 
capital ratios in accordance with subparts A, B, and C of this part, 
provided, however, that such national bank or Federal savings 
association must:
    (A) From January 1, 2014 to December 31, 2014, maintain a minimum 
common equity tier 1 capital ratio of 4 percent, a minimum tier 1 
capital ratio of 5.5 percent, a minimum total capital ratio of 8 
percent, and a minimum leverage ratio of 4 percent; and
    (B) From January 1, 2015 to December 31, 2017, an advanced 
approaches national bank or Federal savings association:
    (1) Is not required to maintain a supplementary leverage ratio; and
    (2) Must calculate a supplementary leverage ratio in accordance with 
Sec. 3.10(c), and must report the calculated supplementary leverage 
ratio on any applicable regulatory reports.
    (2) Subject to the transition provisions in subpart G of this part, 
a national bank or Federal savings association that is not an advanced 
approaches national bank or Federal savings association or a savings and 
loan holding company that is an advanced approaches national bank or 
Federal savings association must:
    (i) Beginning on January 1, 2015, calculate standardized total risk-
weighted assets in accordance with subpart D, and if applicable, subpart 
F of this part; and
    (ii) Beginning on January 1, 2015, calculate and maintain minimum 
capital ratios in accordance with subparts A, B and C of this part, 
provided, however, that from January 1, 2015 to December 31, 2017, a 
savings and loan holding company that is an advanced approaches national 
bank or Federal savings association:
    (A) Is not required to maintain a supplementary leverage ratio; and
    (B) Must calculate a supplementary leverage ratio in accordance with 
Sec. 3.10(c), and must report the calculated supplementary leverage 
ratio on any applicable regulatory reports.
    (3) Beginning on January 1, 2016, and subject to the transition 
provisions in subpart G of this part, a national bank or Federal savings 
association is subject to limitations on distributions and discretionary 
bonus payments with respect to its capital conservation buffer

[[Page 20]]

and any applicable countercyclical capital buffer amount, in accordance 
with subpart B of this part.
    (4) No national bank or Federal savings association that is not an 
advanced approaches bank or advanced approaches savings association is 
subject to this part 3 until January 1, 2015.



Sec. 3.2  Definitions.

    As used in this part:
    Additional tier 1 capital is defined in Sec. 3.20(c).
    Advanced approaches national bank or Federal savings association 
means a national bank or Federal savings association that is described 
in Sec. 3.100(b)(1).
    Advanced approaches total risk-weighted assets means:
    (1) The sum of:
    (i) Credit-risk-weighted assets;
    (ii) Credit valuation adjustment (CVA) risk-weighted assets;
    (iii) Risk-weighted assets for operational risk; and
    (iv) For a market risk national bank or Federal savings association 
only, advanced market risk-weighted assets; minus
    (2) Excess eligible credit reserves not included in the national 
bank's or Federal savings association's tier 2 capital.
    Advanced market risk-weighted assets means the advanced measure for 
market risk calculated under Sec. 3.204 multiplied by 12.5.
    Affiliate with respect to a company, means any company that 
controls, is controlled by, or is under common control with, the 
company.
    Allocated transfer risk reserves means reserves that have been 
established in accordance with section 905(a) of the International 
Lending Supervision Act, against certain assets whose value U.S. 
supervisory authorities have found to be significantly impaired by 
protracted transfer risk problems.
    Allowances for loan and lease losses (ALLL) means valuation 
allowances that have been established through a charge against earnings 
to cover estimated credit losses on loans, lease financing receivables 
or other extensions of credit as determined in accordance with GAAP. 
ALLL excludes ``allocated transfer risk reserves.'' For purposes of this 
part, ALLL includes allowances that have been established through a 
charge against earnings to cover estimated credit losses associated with 
off-balance sheet credit exposures as determined in accordance with 
GAAP.
    Asset-backed commercial paper (ABCP) program means a program 
established primarily for the purpose of issuing commercial paper that 
is investment grade and backed by underlying exposures held in a 
bankruptcy-remote special purpose entity (SPE).
    Asset-backed commercial paper (ABCP) program sponsor means a 
national bank or Federal savings association that:
    (1) Establishes an ABCP program;
    (2) Approves the sellers permitted to participate in an ABCP 
program;
    (3) Approves the exposures to be purchased by an ABCP program; or
    (4) Administers the ABCP program by monitoring the underlying 
exposures, underwriting or otherwise arranging for the placement of debt 
or other obligations issued by the program, compiling monthly reports, 
or ensuring compliance with the program documents and with the program's 
credit and investment policy.
    Bank holding company means a bank holding company as defined in 
section 2 of the Bank Holding Company Act.
    Bank Holding Company Act means the Bank Holding Company Act of 1956, 
as amended (12 U.S.C. 1841 et seq.).
    Bankruptcy remote means, with respect to an entity or asset, that 
the entity or asset would be excluded from an insolvent entity's estate 
in receivership, insolvency, liquidation, or similar proceeding.
    Call Report means Consolidated Reports of Condition and Income.
    Carrying value means, with respect to an asset, the value of the 
asset on the balance sheet of the national bank or Federal savings 
association, determined in accordance with GAAP.
    Central counterparty (CCP) means a counterparty (for example, a 
clearing house) that facilitates trades between counterparties in one or 
more financial markets by either guaranteeing trades or novating 
contracts.
    CFTC means the U.S. Commodity Futures Trading Commission.
    Clean-up call means a contractual provision that permits an 
originating national bank or Federal savings association or servicer to 
call

[[Page 21]]

securitization exposures before their stated maturity or call date.
    Cleared transaction means an exposure associated with an outstanding 
derivative contract or repo-style transaction that a national bank or 
Federal savings association or clearing member has entered into with a 
central counterparty (that is, a transaction that a central counterparty 
has accepted).
    (1) The following transactions are cleared transactions:
    (i) A transaction between a CCP and a national bank or Federal 
savings association that is a clearing member of the CCP where the 
national bank or Federal savings association enters into the transaction 
with the CCP for the national bank's or Federal savings association's 
own account;
    (ii) A transaction between a CCP and a national bank or Federal 
savings association that is a clearing member of the CCP where the 
national bank or Federal savings association is acting as a financial 
intermediary on behalf of a clearing member client and the transaction 
offsets another transaction that satisfies the requirements set forth in 
Sec. 3.3(a);
    (iii) A transaction between a clearing member client national bank 
or Federal savings association and a clearing member where the clearing 
member acts as a financial intermediary on behalf of the clearing member 
client and enters into an offsetting transaction with a CCP, provided 
that the requirements set forth in Sec. 3.3(a) are met; or
    (iv) A transaction between a clearing member client national bank or 
Federal savings association and a CCP where a clearing member guarantees 
the performance of the clearing member client national bank or Federal 
savings association to the CCP and the transaction meets the 
requirements of Sec. 3.3(a)(2) and (3).
    (2) The exposure of a national bank or Federal savings association 
that is a clearing member to its clearing member client is not a cleared 
transaction where the national bank or Federal savings association is 
either acting as a financial intermediary and enters into an offsetting 
transaction with a CCP or where the national bank or Federal savings 
association provides a guarantee to the CCP on the performance of the 
client.\3\
---------------------------------------------------------------------------

    \3\ For the standardized approach treatment of these exposures, see 
Sec. 3.34(e) (OTC derivative contracts) or Sec. 3.37(c) (repo-style 
transactions). For the advanced approaches treatment of these exposures, 
see Secs. 3.132(c)(8) and (d) (OTC derivative contracts) or 
Secs. 3.132(b) and Sec. 3.132(d) (repo-style transactions) and for 
calculation of the margin period of risk, see Secs. 3.132(d)(5)(iii)(C) 
(OTC derivative contracts) and Sec. 3.132(d)(5)(iii)(A) (repo-style 
transactions).
---------------------------------------------------------------------------

    Clearing member means a member of, or direct participant in, a CCP 
that is entitled to enter into transactions with the CCP.
    Clearing member client means 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.
    Collateral agreement means a legal contract that specifies the time 
when, and circumstances under which, a counterparty is required to 
pledge collateral to a national bank or Federal savings association for 
a single financial contract or for all financial contracts in a netting 
set and confers upon the national bank or Federal savings association a 
perfected, first-priority security interest (notwithstanding the prior 
security interest of any custodial agent), or the legal equivalent 
thereof, in the collateral posted by the counterparty under the 
agreement. This security interest must provide the national bank or 
Federal savings association with a right to close out the financial 
positions and liquidate the collateral upon an event of default of, or 
failure to perform by, the counterparty under the collateral agreement. 
A contract would not satisfy this requirement if the national bank's or 
Federal savings association's exercise of rights under the agreement may 
be stayed or avoided under applicable law in the relevant jurisdictions, 
other than in receivership, conservatorship, resolution under the 
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs.

[[Page 22]]

    Commitment means any legally binding arrangement that obligates a 
national bank or Federal savings association to extend credit or to 
purchase assets.
    Commodity derivative contract means a commodity-linked swap, 
purchased commodity-linked option, forward commodity-linked contract, or 
any other instrument linked to commodities that gives rise to similar 
counterparty credit risks.
    Commodity Exchange Act means the Commodity Exchange Act of 1936 (7 
U.S.C. 1 et seq.)
    Common equity tier 1 capital is defined in Sec. 3.20(b).
    Common equity tier 1 minority interest means the common equity tier 
1 capital of a depository institution or foreign bank that is:
    (1) A consolidated subsidiary of a national bank or Federal savings 
association; and
    (2) Not owned by the national bank or Federal savings association.
    Company means a corporation, partnership, limited liability company, 
depository institution, business trust, special purpose entity, 
association, or similar organization.
    Control. A person or company controls a company if it:
    (1) Owns, controls, or holds with power to vote 25 percent or more 
of a class of voting securities of the company; or
    (2) Consolidates the company for financial reporting purposes.
    Core capital means tier 1 capital, as calculated in accordance with 
subpart B of this part.
    Corporate exposure means an exposure to a company that is not:
    (1) An exposure to a sovereign, the Bank for International 
Settlements, the European Central Bank, the European Commission, the 
International Monetary Fund, a multi-lateral development bank (MDB), a 
depository institution, a foreign bank, a credit union, or a public 
sector entity (PSE);
    (2) An exposure to a GSE;
    (3) A residential mortgage exposure;
    (4) A pre-sold construction loan;
    (5) A statutory multifamily mortgage;
    (6) A high volatility commercial real estate (HVCRE) exposure;
    (7) A cleared transaction;
    (8) A default fund contribution;
    (9) A securitization exposure;
    (10) An equity exposure; or
    (11) An unsettled transaction.
    Country risk classification (CRC) with respect to a sovereign, means 
the most recent consensus CRC published by the Organization for Economic 
Cooperation and Development (OECD) as of December 31st of the prior 
calendar year that provides a view of the likelihood that the sovereign 
will service its external debt.
    Covered savings and loan holding company means a top-tier savings 
and loan holding company other than:
    (1) A top-tier savings and loan holding company that is:
    (i) A grandfathered unitary savings and loan holding company as 
defined in section 10(c)(9)(A) of HOLA; and
    (ii) As of June 30 of the previous calendar year, derived 50 percent 
or more of its total consolidated assets or 50 percent of its total 
revenues on an enterprise-wide basis (as calculated under GAAP) from 
activities that are not financial in nature under section 4(k) of the 
Bank Holding Company Act (12 U.S.C. 1842(k));
    (2) A top-tier savings and loan holding company that is an insurance 
underwriting company; or
    (3)(i) A top-tier savings and loan holding company that, as of June 
30 of the previous calendar year, held 25 percent or more of its total 
consolidated assets in subsidiaries that are insurance underwriting 
companies (other than assets associated with insurance for credit risk); 
and
    (ii) For purposes of paragraph (3)(i) of this definition, the 
company must calculate its total consolidated assets in accordance with 
GAAP, or if the company does not calculate its total consolidated assets 
under GAAP for any regulatory purpose (including compliance with 
applicable securities laws), the company may estimate its total 
consolidated assets, subject to review and adjustment by the Board.
    Credit derivative means a financial contract executed under standard 
industry credit derivative documentation that allows one party (the 
protection purchaser) to transfer the credit risk of

[[Page 23]]

one or more exposures (reference exposure(s)) to another party (the 
protection provider) for a certain period of time.
    Credit-enhancing interest-only strip (CEIO) means an on-balance 
sheet asset that, in form or in substance:
    (1) Represents a contractual right to receive some or all of the 
interest and no more than a minimal amount of principal due on the 
underlying exposures of a securitization; and
    (2) Exposes the holder of the CEIO to credit risk directly or 
indirectly associated with the underlying exposures that exceeds a pro 
rata share of the holder's claim on the underlying exposures, whether 
through subordination provisions or other credit-enhancement techniques.
    Credit-enhancing representations and warranties means 
representations and warranties that are made or assumed in connection 
with a transfer of underlying exposures (including loan servicing 
assets) and that obligate a national bank or Federal savings association 
to protect another party from losses arising from the credit risk of the 
underlying exposures. Credit-enhancing representations and warranties 
include provisions to protect a party from losses resulting from the 
default or nonperformance of the counterparties of the underlying 
exposures or from an insufficiency in the value of the collateral 
backing the underlying exposures. Credit-enhancing representations and 
warranties do not include:
    (1) Early default clauses and similar warranties that permit the 
return of, or premium refund clauses covering, 1-4 family residential 
first mortgage loans that qualify for a 50 percent risk weight for a 
period not to exceed 120 days from the date of transfer. These 
warranties may cover only those loans that were originated within 1 year 
of the date of transfer;
    (2) Premium refund clauses that cover assets guaranteed, in whole or 
in part, by the U.S. Government, a U.S. Government agency or a GSE, 
provided the premium refund clauses are for a period not to exceed 120 
days from the date of transfer; or
    (3) Warranties that permit the return of underlying exposures in 
instances of misrepresentation, fraud, or incomplete documentation.
    Credit risk mitigant means collateral, a credit derivative, or a 
guarantee.
    Credit-risk-weighted assets means 1.06 multiplied by the sum of:
    (1) Total wholesale and retail risk-weighted assets as calculated 
under Sec. 3.131;
    (2) Risk-weighted assets for securitization exposures as calculated 
under Sec. 3.142; and
    (3) Risk-weighted assets for equity exposures as calculated under 
Sec. 3.151.
    Credit union means an insured credit union as defined under the 
Federal Credit Union Act (12 U.S.C. 1752 et seq.).
    Current exposure means, with respect to a netting set, the larger of 
zero or the fair value of a transaction or portfolio of transactions 
within the netting set that would be lost upon default of the 
counterparty, assuming no recovery on the value of the transactions. 
Current exposure is also called replacement cost.
    Current exposure methodology means the method of calculating the 
exposure amount for over-the-counter derivative contracts in 
Sec. 3.34(a) and exposure at default (EAD) in Sec. 3.132(c)(5) or (6), 
as applicable.
    Custodian means a financial institution that has legal custody of 
collateral provided to a CCP.
    Default fund contribution means the funds contributed or commitments 
made by a clearing member to a CCP's mutualized loss sharing 
arrangement.
    Depository institution means a depository institution as defined in 
section 3 of the Federal Deposit Insurance Act.
    Depository institution holding company means a bank holding company 
or savings and loan holding company.
    Derivative contract means a financial contract whose value is 
derived from the values of one or more underlying assets, reference 
rates, or indices of asset values or reference rates. Derivative 
contracts include interest rate derivative contracts, exchange rate 
derivative contracts, equity derivative contracts, commodity derivative 
contracts, credit derivative contracts, and any other instrument that 
poses similar counterparty credit risks. Derivative contracts also 
include unsettled securities, commodities, and foreign

[[Page 24]]

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.
    Discretionary bonus payment means a payment made to an executive 
officer of a national bank or Federal savings association, where:
    (1) The national bank or Federal savings association retains 
discretion as to whether to make, and the amount of, the payment until 
the payment is awarded to the executive officer;
    (2) The amount paid is determined by the national bank or Federal 
savings association without prior promise to, or agreement with, the 
executive officer; and
    (3) The executive officer has no contractual right, whether express 
or implied, to the bonus payment.
    Distribution means:
    (1) A reduction of tier 1 capital through the repurchase of a tier 1 
capital instrument or by other means, except when a national bank or 
Federal savings association, within the same quarter when the repurchase 
is announced, fully replaces a tier 1 capital instrument it has 
repurchased by issuing another capital instrument that meets the 
eligibility criteria for:
    (i) A common equity tier 1 capital instrument if the instrument 
being repurchased was part of the national bank's or Federal savings 
association's common equity tier 1 capital, or
    (ii) A common equity tier 1 or additional tier 1 capital instrument 
if the instrument being repurchased was part of the national bank's or 
Federal savings association's tier 1 capital;
    (2) A reduction of tier 2 capital through the repurchase, or 
redemption prior to maturity, of a tier 2 capital instrument or by other 
means, except when a national bank or Federal savings association, 
within the same quarter when the repurchase or redemption is announced, 
fully replaces a tier 2 capital instrument it has repurchased by issuing 
another capital instrument that meets the eligibility criteria for a 
tier 1 or tier 2 capital instrument;
    (3) A dividend declaration or payment on any tier 1 capital 
instrument;
    (4) A dividend declaration or interest payment on any tier 2 capital 
instrument if the national bank or Federal savings association has full 
discretion to permanently or temporarily suspend such payments without 
triggering an event of default; or
    (5) Any similar transaction that the OCC determines to be in 
substance a distribution of capital.
    Dodd-Frank Act means the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (Pub. L. 111-203, 124 Stat. 1376).
    Early amortization provision means a provision in the documentation 
governing a securitization that, when triggered, causes investors in the 
securitization exposures to be repaid before the original stated 
maturity of the securitization exposures, unless the provision:
    (1) Is triggered solely by events not directly related to the 
performance of the underlying exposures or the originating national bank 
or Federal savings association (such as material changes in tax laws or 
regulations); or
    (2) Leaves investors fully exposed to future draws by borrowers on 
the underlying exposures even after the provision is triggered.
    Effective notional amount means for an eligible guarantee or 
eligible credit derivative, the lesser of the contractual notional 
amount of the credit risk mitigant and the exposure amount (or EAD for 
purposes of subpart E of this part) of the hedged exposure, multiplied 
by the percentage coverage of the credit risk mitigant.
    Eligible ABCP liquidity facility means a liquidity facility 
supporting ABCP, in form or in substance, that is subject to an asset 
quality test at the time of draw that precludes funding against assets 
that are 90 days or more past due or in default. 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.
    Eligible clean-up call means a clean-up call that:
    (1) Is exercisable solely at the discretion of the originating 
national bank or Federal savings association or servicer;

[[Page 25]]

    (2) Is not structured to avoid allocating losses to securitization 
exposures held by investors or otherwise structured to provide credit 
enhancement to the securitization; and
    (3)(i) For a traditional securitization, is only exercisable when 10 
percent or less of the principal amount of the underlying exposures or 
securitization exposures (determined as of the inception of the 
securitization) is outstanding; or
    (ii) For a synthetic securitization, is only exercisable when 10 
percent or less of the principal amount of the reference portfolio of 
underlying exposures (determined as of the inception of the 
securitization) is outstanding.
    Eligible credit derivative means a credit derivative in the form of 
a credit default swap, nth-to-default swap, total return 
swap, or any other form of credit derivative approved by the OCC, 
provided that:
    (1) The contract meets the requirements of an eligible guarantee and 
has been confirmed by the protection purchaser and the protection 
provider;
    (2) Any assignment of the contract has been confirmed by all 
relevant parties;
    (3) If the credit derivative is a credit default swap or 
nth-to-default swap, the contract includes the following 
credit events:
    (i) Failure to pay any amount due under the terms of the reference 
exposure, subject to any applicable minimal payment threshold that is 
consistent with standard market practice and with a grace period that is 
closely in line with the grace period of the reference exposure; and
    (ii) Receivership, insolvency, liquidation, conservatorship or 
inability of the reference exposure issuer to pay its debts, or its 
failure or admission in writing of its inability generally to pay its 
debts as they become due, and similar events;
    (4) The terms and conditions dictating the manner in which the 
contract is to be settled are incorporated into the contract;
    (5) If the contract allows for cash settlement, the contract 
incorporates a robust valuation process to estimate loss reliably and 
specifies a reasonable period for obtaining post-credit event valuations 
of the reference exposure;
    (6) If the contract requires the protection purchaser to transfer an 
exposure to the protection provider at settlement, the terms of at least 
one of the exposures that is permitted to be transferred under the 
contract provide that any required consent to transfer may not be 
unreasonably withheld;
    (7) If the credit derivative is a credit default swap or 
nth-to-default swap, the contract clearly identifies the 
parties responsible for determining whether a credit event has occurred, 
specifies that this determination is not the sole responsibility of the 
protection provider, and gives the protection purchaser the right to 
notify the protection provider of the occurrence of a credit event; and
    (8) If the credit derivative is a total return swap and the national 
bank or Federal savings association records net payments received on the 
swap as net income, the national bank or Federal savings association 
records offsetting deterioration in the value of the hedged exposure 
(either through reductions in fair value or by an addition to reserves).
    Eligible credit reserves means all general allowances that have been 
established through a charge against earnings to cover estimated credit 
losses associated with on- or off-balance sheet wholesale and retail 
exposures, including the ALLL associated with such exposures, but 
excluding allocated transfer risk reserves established pursuant to 12 
U.S.C. 3904 and other specific reserves created against recognized 
losses.
    Eligible guarantee means a guarantee from an eligible guarantor 
that:
    (1) Is written;
    (2) Is either:
    (i) Unconditional, or
    (ii) A contingent obligation of the U.S. government or its agencies, 
the enforceability of which is dependent upon some affirmative action on 
the part of the beneficiary of the guarantee or a third party (for 
example, meeting servicing requirements);
    (3) Covers all or a pro rata portion of all contractual payments of 
the obligated party on the reference exposure;
    (4) Gives the beneficiary a direct claim against the protection 
provider;

[[Page 26]]

    (5) Is not unilaterally cancelable by the protection provider for 
reasons other than the breach of the contract by the beneficiary;
    (6) Except for a guarantee by a sovereign, is legally enforceable 
against the protection provider in a jurisdiction where the protection 
provider has sufficient assets against which a judgment may be attached 
and enforced;
    (7) Requires the protection provider to make payment to the 
beneficiary on the occurrence of a default (as defined in the guarantee) 
of the obligated party on the reference exposure in a timely manner 
without the beneficiary first having to take legal actions to pursue the 
obligor for payment;
    (8) Does not increase the beneficiary's cost of credit protection on 
the guarantee in response to deterioration in the credit quality of the 
reference exposure; and
    (9) Is not provided by an affiliate of the national bank or Federal 
savings association, unless the affiliate is an insured depository 
institution, foreign bank, securities broker or dealer, or insurance 
company that:
    (i) Does not control the national bank or Federal savings 
association; and
    (ii) Is subject to consolidated supervision and regulation 
comparable to that imposed on depository institutions, U.S. securities 
broker-dealers, or U.S. insurance companies (as the case may be).
    Eligible guarantor means:
    (1) A sovereign, the Bank for International Settlements, the 
International Monetary Fund, the European Central Bank, the European 
Commission, a Federal Home Loan Bank, Federal Agricultural Mortgage 
Corporation (Farmer Mac), a multilateral development bank (MDB), a 
depository institution, a bank holding company, a savings and loan 
holding company, a credit union, a foreign bank, or a qualifying central 
counterparty; or
    (2) An entity (other than a special purpose entity):
    (i) That at the time the guarantee is issued or anytime thereafter, 
has issued and outstanding an unsecured debt security without credit 
enhancement that is investment grade;
    (ii) Whose creditworthiness is not positively correlated with the 
credit risk of the exposures for which it has provided guarantees; and
    (iii) That is not an insurance company engaged predominately in the 
business of providing credit protection (such as a monoline bond insurer 
or re-insurer).
    Eligible margin loan means:
    (1) An extension of credit where:
    (i) The extension of credit is collateralized exclusively by liquid 
and readily marketable debt or equity securities, or gold;
    (ii) The collateral is marked-to-fair value daily, and the 
transaction is subject to daily margin maintenance requirements; and
    (iii) The extension of credit is conducted under an agreement that 
provides the national bank or Federal savings association the right to 
accelerate and terminate the extension of credit and to liquidate or 
set-off collateral promptly upon an event of default, including upon an 
event of receivership, insolvency, liquidation, conservatorship, or 
similar proceeding, of the counterparty, provided that, in any such 
case, any exercise of rights under the agreement will not be stayed or 
avoided under applicable law in the relevant jurisdictions, other than 
in receivership, conservatorship, resolution under the Federal Deposit 
Insurance Act, Title II of the Dodd-Frank Act, or under any similar 
insolvency law applicable to GSEs.\4\
---------------------------------------------------------------------------

    \4\ This requirement is met where all transactions under the 
agreement are (i) executed under U.S. law and (ii) constitute 
``securities contracts'' under section 555 of the Bankruptcy Code (11 
U.S.C. 555), qualified financial contracts under section 11(e)(8) of the 
Federal Deposit Insurance Act, or netting contracts between or among 
financial institutions under sections 401-407 of the Federal Deposit 
Insurance Corporation Improvement Act or the Federal Reserve Board's 
Regulation EE (12 CFR part 231).
---------------------------------------------------------------------------

    (2) In order to recognize an exposure as an eligible margin loan for 
purposes of this subpart, a national bank or Federal savings association 
must comply with the requirements of Sec. 3.3(b) with respect to that 
exposure.

[[Page 27]]

    Eligible servicer cash advance facility means a servicer cash 
advance facility in which:
    (1) The servicer is entitled to full reimbursement of advances, 
except that a servicer may be obligated to make non-reimbursable 
advances for a particular underlying exposure if any such advance is 
contractually limited to an insignificant amount of the outstanding 
principal balance of that exposure;
    (2) The servicer's right to reimbursement is senior in right of 
payment to all other claims on the cash flows from the underlying 
exposures of the securitization; and
    (3) The servicer has no legal obligation to, and does not make 
advances to the securitization if the servicer concludes the advances 
are unlikely to be repaid.
    Employee stock ownership plan has the same meaning as in 29 CFR 
2550.407d-6.
    Equity derivative contract means an equity-linked swap, purchased 
equity-linked option, forward equity-linked contract, or any other 
instrument linked to equities that gives rise to similar counterparty 
credit risks.
    Equity exposure means:
    (1) A security or instrument (whether voting or non-voting) that 
represents a direct or an indirect ownership interest in, and is a 
residual claim on, the assets and income of a company, unless:
    (i) The issuing company is consolidated with the national bank or 
Federal savings association under GAAP;
    (ii) The national bank or Federal savings association is required to 
deduct the ownership interest from tier 1 or tier 2 capital under this 
part;
    (iii) The ownership interest incorporates a payment or other similar 
obligation on the part of the issuing company (such as an obligation to 
make periodic payments); or
    (iv) The ownership interest is a securitization exposure;
    (2) A security or instrument that is mandatorily convertible into a 
security or instrument described in paragraph (1) of this definition;
    (3) An option or warrant that is exercisable for a security or 
instrument described in paragraph (1) of this definition; or
    (4) Any other security or instrument (other than a securitization 
exposure) to the extent the return on the security or instrument is 
based on the performance of a security or instrument described in 
paragraph (1) of this definition.
    ERISA means the Employee Retirement Income and Security Act of 1974 
(29 U.S.C. 1001 et seq.).
    Exchange rate derivative contract means a cross-currency interest 
rate swap, forward foreign-exchange contract, currency option purchased, 
or any other instrument linked to exchange rates that gives rise to 
similar counterparty credit risks.
    Executive officer means a person who holds the title or, without 
regard to title, salary, or compensation, performs the function of one 
or more of the following positions: President, chief executive officer, 
executive chairman, chief operating officer, chief financial officer, 
chief investment officer, chief legal officer, chief lending officer, 
chief risk officer, or head of a major business line, and other staff 
that the board of directors of the national bank or Federal savings 
association deems to have equivalent responsibility.
    Expected credit loss (ECL) means:
    (1) For a wholesale exposure to a non-defaulted obligor or segment 
of non-defaulted retail exposures that is carried at fair value with 
gains and losses flowing through earnings or that is classified as held-
for-sale and is carried at the lower of cost or fair value with losses 
flowing through earnings, zero.
    (2) For all other wholesale exposures to non-defaulted obligors or 
segments of non-defaulted retail exposures, the product of the 
probability of default (PD) times the loss given default (LGD) times the 
exposure at default (EAD) for the exposure or segment.
    (3) For a wholesale exposure to a defaulted obligor or segment of 
defaulted retail exposures, the national bank's or Federal savings 
association's impairment estimate for allowance purposes for the 
exposure or segment.
    (4) Total ECL is the sum of expected credit losses for all wholesale 
and retail exposures other than exposures for which the national bank or 
Federal

[[Page 28]]

savings association has applied the double default treatment in 
Sec. 3.135.
    Exposure amount means:
    (1) For the on-balance sheet component of an exposure (other than an 
available-for-sale or held-to-maturity security, if the national bank or 
Federal savings association has made an AOCI opt-out election (as 
defined in Sec. 3.22(b)(2)); an OTC derivative contract; a repo-style 
transaction or an eligible margin loan for which the national bank or 
Federal savings association determines the exposure amount under 
Sec. 3.37; a cleared transaction; a default fund contribution; or a 
securitization exposure), the national bank's or Federal savings 
association's carrying value of the exposure.
    (2) For a security (that is not a securitization exposure, equity 
exposure, or preferred stock classified as an equity security under 
GAAP) classified as available-for-sale or held-to-maturity if the 
national bank or Federal savings association has made an AOCI opt-out 
election (as defined in Sec. 3.22(b)(2)), the national bank's or Federal 
savings association's carrying value (including net accrued but unpaid 
interest and fees) for the exposure less any net unrealized gains on the 
exposure and plus any net unrealized losses on the exposure.
    (3) For available-for-sale preferred stock classified as an equity 
security under GAAP if the national bank or Federal savings association 
has made an AOCI opt-out election (as defined in Sec. 3.22(b)(2)), the 
national bank's or Federal savings association's carrying value of the 
exposure less any net unrealized gains on the exposure that are 
reflected in such carrying value but excluded from the national bank's 
or Federal savings association's regulatory capital components.
    (4) For the off-balance sheet component of an exposure (other than 
an OTC derivative contract; a repo-style transaction or an eligible 
margin loan for which the national bank or Federal savings association 
calculates the exposure amount under Sec. 3.37; a cleared transaction; a 
default fund contribution; or a securitization exposure), the notional 
amount of the off-balance sheet component multiplied by the appropriate 
credit conversion factor (CCF) in Sec. 3.33.
    (5) For an exposure that is an OTC derivative contract, the exposure 
amount determined under Sec. 3.34.
    (6) For an exposure that is a cleared transaction, the exposure 
amount determined under Sec. 3.35.
    (7) For an exposure that is an eligible margin loan or repo-style 
transaction for which the bank calculates the exposure amount as 
provided in Sec. 3.37, the exposure amount determined under Sec. 3.37.
    (8) For an exposure that is a securitization exposure, the exposure 
amount determined under Sec. 3.42.
    Federal Deposit Insurance Act means the Federal Deposit Insurance 
Act (12 U.S.C. 1813).
    Federal Deposit Insurance Corporation Improvement Act means the 
Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 
4401).
    Financial collateral means collateral:
    (1) In the form of:
    (i) Cash on deposit with the national bank or Federal savings 
association (including cash held for the national bank or Federal 
savings association by a third-party custodian or trustee);
    (ii) Gold bullion;
    (iii) Long-term debt securities that are not resecuritization 
exposures and that are investment grade;
    (iv) Short-term debt instruments that are not resecuritization 
exposures and that are investment grade;
    (v) Equity securities that are publicly traded;
    (vi) Convertible bonds that are publicly traded; or
    (vii) Money market fund shares and other mutual fund shares if a 
price for the shares is publicly quoted daily; and
    (2) In which the national bank or Federal savings association has a 
perfected, first-priority security interest or, outside of the United 
States, the legal equivalent thereof (with the exception of cash on 
deposit and notwithstanding the prior security interest of any custodial 
agent).
    Federal savings association means an insured Federal savings 
association or an insured Federal savings bank chartered under section 5 
of the Home Owners' Loan Act of 1933.
    Financial institution means:

[[Page 29]]

    (1) A bank holding company; savings and loan holding company; 
nonbank financial institution supervised by the Board under Title I of 
the Dodd-Frank Act; depository institution; foreign bank; credit union; 
industrial loan company, industrial bank, or other similar institution 
described in section 2 of the Bank Holding Company Act; national 
association, state member bank, or state non-member bank that is not a 
depository institution; insurance company; securities holding company as 
defined in section 618 of the Dodd-Frank Act; broker or dealer 
registered with the SEC under section 15 of the Securities Exchange Act; 
futures commission merchant as defined in section 1a of the Commodity 
Exchange Act; swap dealer as defined in section 1a of the Commodity 
Exchange Act; or security-based swap dealer as defined in section 3 of 
the Securities Exchange Act;
    (2) Any designated financial market utility, as defined in section 
803 of the Dodd-Frank Act;
    (3) Any entity not domiciled in the United States (or a political 
subdivision thereof) that is supervised and regulated in a manner 
similar to entities described in paragraphs (1) or (2) of this 
definition; or
    (4) Any other company:
    (i) Of which the national bank or Federal savings association owns:
    (A) An investment in GAAP equity instruments of the company with an 
adjusted carrying value or exposure amount equal to or greater than $10 
million; or
    (B) More than 10 percent of the company's issued and outstanding 
common shares (or similar equity interest), and
    (ii) Which is predominantly engaged in the following activities:
    (A) Lending money, securities or other financial instruments, 
including servicing loans;
    (B) Insuring, guaranteeing, indemnifying against loss, harm, damage, 
illness, disability, or death, or issuing annuities;
    (C) Underwriting, dealing in, making a market in, or investing as 
principal in securities or other financial instruments; or
    (D) Asset management activities (not including investment or 
financial advisory activities).
    (5) For the purposes of this definition, a company is 
``predominantly engaged'' in an activity or activities if:
    (i) 85 percent or more of the total consolidated annual gross 
revenues (as determined in accordance with applicable accounting 
standards) of the company is either of the two most recent calendar 
years were derived, directly or indirectly, by the company on a 
consolidated basis from the activities; or
    (ii) 85 percent or more of the company's consolidated total assets 
(as determined in accordance with applicable accounting standards) as of 
the end of either of the two most recent calendar years were related to 
the activities.
    (6) Any other company that the OCC may determine is a financial 
institution based on activities similar in scope, nature, or operation 
to those of the entities included in paragraphs (1) through (4) of this 
definition.
    (7) For purposes of this part, ``financial institution'' does not 
include the following entities:
    (i) GSEs;
    (ii) Small business investment companies, as defined in section 102 
of the Small Business Investment Act of 1958 (15 U.S.C. 662);
    (iii) Entities designated as Community Development Financial 
Institutions (CDFIs) under 12 U.S.C. 4701 et seq. and 12 CFR part 1805;
    (iv) Entities registered with the SEC under the Investment Company 
Act of 1940 (15 U.S.C. 80a-1) or foreign equivalents thereof;
    (v) Entities to the extent that the national bank's or Federal 
savings association's investment in such entities would qualify as a 
community development investment under section 24 (Eleventh) of the 
National Bank Act; and
    (vi) An employee benefit plan as defined in paragraphs (3) and (32) 
of section 3 of ERISA, a ``governmental plan'' (as defined in 29 U.S.C. 
1002(32)) that complies with the tax deferral qualification requirements 
provided in the Internal Revenue Code, or any similar employee benefit 
plan established under the laws of a foreign jurisdiction.

[[Page 30]]

    First-lien residential mortgage exposure means a residential 
mortgage exposure secured by a first lien.
    Foreign bank means a foreign bank as defined in Sec. 211.2 of the 
Federal Reserve Board's Regulation K (12 CFR 211.2) (other than a 
depository institution).
    Forward agreement means a legally binding contractual obligation to 
purchase assets with certain drawdown at a specified future date, not 
including commitments to make residential mortgage loans or forward 
foreign exchange contracts.
    GAAP means generally accepted accounting principles as used in the 
United States.
    Gain-on-sale means an increase in the equity capital of a national 
bank or Federal savings association (as reported on [Schedule RC of the 
Call Report or Schedule HC of the FR Y-9C]) resulting from a traditional 
securitization (other than an increase in equity capital resulting from 
the national bank's or Federal savings association's receipt of cash in 
connection with the securitization or reporting of a mortgage servicing 
asset on [Schedule RC of the Call Report or Schedule HC of the FRY-9C]).
    General obligation means a bond or similar obligation that is backed 
by the full faith and credit of a public sector entity (PSE).
    Government-sponsored enterprise (GSE) means an entity established or 
chartered by the U.S. government to serve public purposes specified by 
the U.S. Congress but whose debt obligations are not explicitly 
guaranteed by the full faith and credit of the U.S. government.
    Guarantee means a financial guarantee, letter of credit, insurance, 
or other similar financial instrument (other than a credit derivative) 
that allows one party (beneficiary) to transfer the credit risk of one 
or more specific exposures (reference exposure) to another party 
(protection provider).
    High volatility commercial real estate (HVCRE) exposure means a 
credit facility that, prior to conversion to permanent financing, 
finances or has financed the acquisition, development, or construction 
(ADC) of real property, unless the facility finances:
    (1) One- to four-family residential properties;
    (2) Real property that:
    (i) Would qualify as an investment in community development under 12 
U.S.C. 338a or 12 U.S.C. 24 (Eleventh), as applicable, or as a 
``qualified investment'' under 12 CFR parts 25 (national banks) and 195 
(Federal savings associations), and
    (ii) Is not an ADC loan to any entity described in 12 CFR 
25.12(g)(3) (national banks) and 12 CFR 195.12(g)(3) (Federal savings 
associations), unless it is otherwise described in paragraph (1), 
(2)(i), (3) or (4) of this definition;
    (3) The purchase or development of agricultural land, which includes 
all land known to be used or usable for agricultural purposes (such as 
crop and livestock production), provided that the valuation of the 
agricultural land is based on its value for agricultural purposes and 
the valuation does not take into consideration any potential use of the 
land for non-agricultural commercial development or residential 
development; or
    (4) Commercial real estate projects in which:
    (i) The loan-to-value ratio is less than or equal to the applicable 
maximum supervisory loan-to-value ratio in the OCC's real estate lending 
standards at 12 CFR part 34, subpart D (national banks) and 12 CFR part 
160, subparts A and B (Federal savings associations);
    (ii) The borrower has contributed capital to the project in the form 
of cash or unencumbered readily marketable assets (or has paid 
development expenses out-of-pocket) of at least 15 percent of the real 
estate's appraised ``as completed'' value; and
    (iii) The borrower contributed the amount of capital required by 
paragraph (4)(ii) of this definition before the national bank or Federal 
savings association 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

[[Page 31]]

sold or paid in full. Permanent financing may be provided by the 
national bank or Federal savings association that provided the ADC 
facility as long as the permanent financing is subject to the national 
bank's or Federal savings association's underwriting criteria for long-
term mortgage loans.
    Home country means the country where an entity is incorporated, 
chartered, or similarly established.
    Indirect exposure means an exposure that arises from the national 
bank's or Federal savings association's investment in an investment fund 
which holds an investment in the national bank's or Federal savings 
association's own capital instrument or an investment in the capital of 
an unconsolidated financial institution.
    Insurance company means an insurance company as defined in section 
201 of the Dodd-Frank Act (12 U.S.C. 5381).
    Insurance underwriting company means an insurance company as defined 
in section 201 of the Dodd-Frank Act (12 U.S.C. 5381) that engages in 
insurance underwriting activities.
    Insured depository institution means an insured depository 
institution as defined in section 3 of the Federal Deposit Insurance 
Act.
    Interest rate derivative contract means a single-currency interest 
rate swap, basis swap, forward rate agreement, purchased interest rate 
option, when-issued securities, or any other instrument linked to 
interest rates that gives rise to similar counterparty credit risks.
    International Lending Supervision Act means the International 
Lending Supervision Act of 1983 (12 U.S.C. 3907).
    Investing bank means, with respect to a securitization, a national 
bank or Federal savings association that assumes the credit risk of a 
securitization exposure (other than an originating national bank or 
Federal savings association of the securitization). In the typical 
synthetic securitization, the investing national bank or Federal savings 
association sells credit protection on a pool of underlying exposures to 
the originating national bank or Federal savings association.
    Investment fund means a company:
    (1) Where all or substantially all of the assets of the company are 
financial assets; and
    (2) That has no material liabilities.
    Investment grade means that the entity to which the national bank or 
Federal savings association 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.
    Investment in the capital of an unconsolidated financial institution 
means a net long position calculated in accordance with Sec. 3.22(h) in 
an instrument that is recognized as capital for regulatory purposes by 
the primary supervisor of an unconsolidated regulated financial 
institution and is an instrument that is part of the GAAP equity of an 
unconsolidated unregulated financial institution, including direct, 
indirect, and synthetic exposures to capital instruments, excluding 
underwriting positions held by the national bank or Federal savings 
association for five or fewer business days.
    Investment in the national bank's or Federal savings association's 
own capital instrument means a net long position calculated in 
accordance with Sec. 3.22(h) in the national bank's or Federal savings 
association's own common stock instrument, own additional tier 1 capital 
instrument or own tier 2 capital instrument, including direct, indirect, 
or synthetic exposures to such capital instruments. An investment in the 
national bank's or Federal savings association's own capital instrument 
includes any contractual obligation to purchase such capital instrument.
    Junior-lien residential mortgage exposure means a residential 
mortgage exposure that is not a first-lien residential mortgage 
exposure.
    Main index means the Standard & Poor's 500 Index, the FTSE All-World 
Index, and any other index for which the national bank or Federal 
savings association can demonstrate to the satisfaction of the OCC that 
the equities

[[Page 32]]

represented in the index have comparable liquidity, depth of market, and 
size of bid-ask spreads as equities in the Standard & Poor's 500 Index 
and FTSE All-World Index.
    Market risk [BANK] means a national bank or Federal savings 
association that is described in Sec. 3.201(b).
    Money market fund means an investment fund that is subject to 17 CFR 
270.2a-7 or any foreign equivalent thereof.
    Mortgage servicing assets (MSAs) means the contractual rights owned 
by a national bank or Federal savings association to service for a fee 
mortgage loans that are owned by others.
    Multilateral development bank (MDB) means 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 OCC determines poses 
comparable credit risk.
    National Bank Act means the National Bank Act (12 U.S.C. 24).
    Netting set means 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. For purposes of 
calculating risk-based capital requirements using the internal models 
methodology in subpart E of this part, this term does not cover a 
transaction:
    (1) That is not subject to such a master netting agreement; or
    (2) Where the national bank or Federal savings association has 
identified specific wrong-way risk.
    Non-significant investment in the capital of an unconsolidated 
financial institution means an investment in the capital of an 
unconsolidated financial institution where the national bank or Federal 
savings association owns 10 percent or less of the issued and 
outstanding common stock of the unconsolidated financial institution.
    Nth-to-default credit derivative means a credit 
derivative that provides credit protection only for the nth-
defaulting reference exposure in a group of reference exposures.
    Operating entity means a company established to conduct business 
with clients with the intention of earning a profit in its own right.
    Original maturity with respect to an off-balance sheet commitment 
means the length of time between the date a commitment is issued and:
    (1) For a commitment that is not subject to extension or renewal, 
the stated expiration date of the commitment; or
    (2) For a commitment that is subject to extension or renewal, the 
earliest date on which the national bank or Federal savings association 
can, at its option, unconditionally cancel the commitment.
    Originating national bank or Federal savings association, with 
respect to a securitization, means a national bank or Federal savings 
association that:
    (1) Directly or indirectly originated or securitized the underlying 
exposures included in the securitization; or
    (2) Serves as an ABCP program sponsor to the securitization.
    Over-the-counter (OTC) derivative contract means a derivative 
contract that is not a cleared transaction. An OTC derivative includes a 
transaction:
    (1) Between a national bank or Federal savings association that is a 
clearing member and a counterparty where the national bank or Federal 
savings association is acting as a financial intermediary and enters 
into a cleared transaction with a CCP that offsets the transaction with 
the counterparty; or
    (2) In which a national bank or Federal savings association that is 
a clearing member provides a CCP a guarantee on the performance of the 
counterparty to the transaction.
    Performance standby letter of credit (or performance bond) means an 
irrevocable obligation of a national bank or Federal savings association 
to pay a third-

[[Page 33]]

party beneficiary when a customer (account party) fails to perform on 
any contractual nonfinancial or commercial obligation. To the extent 
permitted by law or regulation, performance standby letters of credit 
include arrangements backing, among other things, subcontractors' and 
suppliers' performance, labor and materials contracts, and construction 
bids.
    Pre-sold construction loan means any one-to-four family residential 
construction loan to a builder that meets the requirements of section 
618(a)(1) or (2) of the Resolution Trust Corporation Refinancing, 
Restructuring, and Improvement Act of 1991 (12 U.S.C. 1831n note) and 
the following criteria:
    (1) The loan is made in accordance with prudent underwriting 
standards, meaning that the national bank or Federal savings association 
has obtained sufficient documentation that the buyer of the home has a 
legally binding written sales contract and has a firm written commitment 
for permanent financing of the home upon completion;
    (2) The purchaser is an individual(s) that intends to occupy the 
residence and is not a partnership, joint venture, trust, corporation, 
or any other entity (including an entity acting as a sole 
proprietorship) that is purchasing one or more of the residences for 
speculative purposes;
    (3) The purchaser has entered into a legally binding written sales 
contract for the residence;
    (4) The purchaser has not terminated the contract;
    (5) The purchaser has made a substantial earnest money deposit of no 
less than 3 percent of the sales price, which is subject to forfeiture 
if the purchaser terminates the sales contract; provided that, the 
earnest money deposit shall not be subject to forfeiture by reason of 
breach or termination of the sales contract on the part of the builder;
    (6) The earnest money deposit must be held in escrow by the national 
bank or Federal savings association or an independent party in a 
fiduciary capacity, and the escrow agreement must provide that in an 
event of default arising from the cancellation of the sales contract by 
the purchaser of the residence, the escrow funds shall be used to defray 
any cost incurred by the national bank or Federal savings association;
    (7) The builder must incur at least the first 10 percent of the 
direct costs of construction of the residence (that is, actual costs of 
the land, labor, and material) before any drawdown is made under the 
loan;
    (8) The loan may not exceed 80 percent of the sales price of the 
presold residence; and
    (9) The loan is not more than 90 days past due, or on nonaccrual.
    Protection amount (P) means, with respect to an exposure hedged by 
an eligible guarantee or eligible credit derivative, the effective 
notional amount of the guarantee or credit derivative, reduced to 
reflect any currency mismatch, maturity mismatch, or lack of 
restructuring coverage (as provided in Secs. 3.36 or 3.134, as 
appropriate).
    Publicly-traded means traded on:
    (1) Any exchange registered with the SEC as a national securities 
exchange under section 6 of the Securities Exchange Act; or
    (2) Any non-U.S.-based securities exchange that:
    (i) Is registered with, or approved by, a national securities 
regulatory authority; and
    (ii) Provides a liquid, two-way market for the instrument in 
question.
    Public sector entity (PSE) means a state, local authority, or other 
governmental subdivision below the sovereign level.
    Qualifying central counterparty (QCCP) means a central counterparty 
that:
    (1)(i) Is a designated financial market utility (FMU) under Title 
VIII of the Dodd-Frank Act;
    (ii) If not located in the United States, is regulated and 
supervised in a manner equivalent to a designated FMU; or
    (iii) Meets the following standards:
    (A) The central counterparty requires all parties to contracts 
cleared by the counterparty to be fully collateralized on a daily basis;
    (B) The national bank or Federal savings association demonstrates to 
the satisfaction of the OCC that the central counterparty:

[[Page 34]]

    (1) Is in sound financial condition;
    (2) Is subject to supervision by the Board, the CFTC, or the 
Securities Exchange Commission (SEC), or, if the central counterparty is 
not located in the United States, is subject to effective oversight by a 
national supervisory authority in its home country; and
    (3) Meets or exceeds the risk-management standards for central 
counterparties set forth in regulations established by the Board, the 
CFTC, or the SEC under Title VII or Title VIII of the Dodd-Frank Act; or 
if the central counterparty is not located in the United States, meets 
or exceeds similar risk-management standards established under the law 
of its home country that are consistent with international standards for 
central counterparty risk management as established by the relevant 
standard setting body of the Bank of International Settlements; and
    (2)(i) Provides the national bank or Federal savings association 
with the central counterparty's hypothetical capital requirement or the 
information necessary to calculate such hypothetical capital 
requirement, and other information the national bank or Federal savings 
association is required to obtain under Secs. 3.35(d)(3) and 
3.133(d)(3);
    (ii) Makes available to the OCC and the CCP's regulator the 
information described in paragraph (2)(i) of this definition; and
    (iii) Has not otherwise been determined by the OCC to not be a QCCP 
due to its financial condition, risk profile, failure to meet 
supervisory risk management standards, or other weaknesses or 
supervisory concerns that are inconsistent with the risk weight assigned 
to qualifying central counterparties under Secs. 3.35 and 3.133.
    (3) Exception. A QCCP that fails to meet the requirements of a QCCP 
in the future may still be treated as a QCCP under the conditions 
specified in Sec. 3.3(f).
    Qualifying master netting agreement means a written, legally 
enforceable agreement provided that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default, including upon an event of receivership, insolvency, 
liquidation, or similar proceeding, of the counterparty;
    (2) The agreement provides the national bank or Federal savings 
association the right to accelerate, terminate, and close-out on a net 
basis all transactions under the agreement and to liquidate or set-off 
collateral promptly upon an event of default, including upon an event of 
receivership, insolvency, liquidation, or similar proceeding, of the 
counterparty, provided that, in any such case, any exercise of rights 
under the agreement will not be stayed or avoided under applicable law 
in the relevant jurisdictions, other than in receivership, 
conservatorship, resolution under the Federal Deposit Insurance Act, 
Title II of the Dodd-Frank Act, or under any similar insolvency law 
applicable to GSEs;
    (3) The agreement does not contain a walkaway clause (that is, a 
provision that permits a non-defaulting counterparty to make a lower 
payment than it otherwise would make under the agreement, or no payment 
at all, to a defaulter or the estate of a defaulter, even if the 
defaulter or the estate of the defaulter is a net creditor under the 
agreement); and
    (4) In order to recognize an agreement as a qualifying master 
netting agreement for purposes of this subpart, a national bank or 
Federal savings association must comply with the requirements of 
Sec. 3.3(d) with respect to that agreement.
    Regulated financial institution means a financial institution 
subject to consolidated supervision and regulation comparable to that 
imposed on the following U.S. financial institutions: Depository 
institutions, depository institution holding companies, nonbank 
financial companies supervised by the Board, designated financial market 
utilities, securities broker-dealers, credit unions, or insurance 
companies.
    Repo-style transaction means a repurchase or reverse repurchase 
transaction, or a securities borrowing or securities lending 
transaction, including a transaction in which the national bank or 
Federal savings association acts as agent for a customer and indemnifies 
the customer against loss, provided that:

[[Page 35]]

    (1) The transaction is based solely on liquid and readily marketable 
securities, cash, or gold;
    (2) The transaction is marked-to-fair value daily and subject to 
daily margin maintenance requirements;
    (3)(i) The transaction is a ``securities contract'' or ``repurchase 
agreement'' under section 555 or 559, respectively, of the Bankruptcy 
Code (11 U.S.C. 555 or 559), a qualified financial contract under 
section 11(e)(8) of the Federal Deposit Insurance Act, or a netting 
contract between or among financial institutions under sections 401-407 
of the Federal Deposit Insurance Corporation Improvement Act or the 
Federal Reserve Board's Regulation EE (12 CFR part 231); or
    (ii) If the transaction does not meet the criteria set forth in 
paragraph (3)(i) of this definition, then either:
    (A) The transaction is executed under an agreement that provides the 
national bank or Federal savings association the right to accelerate, 
terminate, and close-out the transaction on a net basis and to liquidate 
or set-off collateral promptly upon an event of default, including upon 
an event of receivership, insolvency, liquidation, or similar 
proceeding, of the counterparty, provided that, in any such case, any 
exercise of rights under the agreement will not be stayed or avoided 
under applicable law in the relevant jurisdictions, other than in 
receivership, conservatorship, resolution under the Federal Deposit 
Insurance Act, Title II of the Dodd-Frank Act, or under any similar 
insolvency law applicable to GSEs; or
    (B) The transaction is:
    (1) Either overnight or unconditionally cancelable at any time by 
the national bank or Federal savings association; and
    (2) Executed under an agreement that provides the national bank or 
Federal savings association the right to accelerate, terminate, and 
close-out the transaction on a net basis and to liquidate or set-off 
collateral promptly upon an event of counterparty default; and
    (4) In order to recognize an exposure as a repo-style transaction 
for purposes of this subpart, a national bank or Federal savings 
association must comply with the requirements of Sec. 3.3(e) of this 
part with respect to that exposure.
    Resecuritization means a securitization which has more than one 
underlying exposure and in which one or more of the underlying exposures 
is a securitization exposure.
    Resecuritization exposure means:
    (1) An on- or off-balance sheet exposure to a resecuritization;
    (2) An exposure that directly or indirectly references a 
resecuritization exposure.
    (3) An exposure to an asset-backed commercial paper program is not a 
resecuritization exposure if either:
    (i) The program-wide credit enhancement does not meet the definition 
of a resecuritization exposure; or
    (ii) 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.
    Residential mortgage exposure means an exposure (other than a 
securitization exposure, equity exposure, statutory multifamily 
mortgage, or presold construction loan) that is:
    (1) An exposure that is primarily secured by a first or subsequent 
lien on one-to-four family residential property; or
    (2)(i) An exposure with an original and outstanding amount of $1 
million or less that is primarily secured by a first or subsequent lien 
on residential property that is not one-to-four family; and
    (ii) For purposes of calculating capital requirements under subpart 
E of this part, is managed as part of a segment of exposures with 
homogeneous risk characteristics and not on an individual-exposure 
basis.
    Revenue obligation means a bond or similar obligation that is an 
obligation of a PSE, but which the PSE is committed to repay with 
revenues from the specific project financed rather than general tax 
funds.
    Savings and loan holding company means a savings and loan holding 
company as defined in section 10 of the Home Owners' Loan Act (12 U.S.C. 
1467a).

[[Page 36]]

    Securities and Exchange Commission (SEC) means the U.S. Securities 
and Exchange Commission.
    Securities Exchange Act means the Securities Exchange Act of 1934 
(15 U.S.C. 78).
    Securitization exposure means:
    (1) An on-balance sheet or off-balance sheet credit exposure 
(including credit-enhancing representations and warranties) that arises 
from a traditional securitization or synthetic securitization (including 
a resecuritization), or
    (2) An exposure that directly or indirectly references a 
securitization exposure described in paragraph (1) of this definition.
    Securitization special purpose entity (securitization SPE) means a 
corporation, trust, or other entity organized for the specific purpose 
of holding underlying exposures of a securitization, the activities of 
which are limited to those appropriate to accomplish this purpose, and 
the structure of which is intended to isolate the underlying exposures 
held by the entity from the credit risk of the seller of the underlying 
exposures to the entity.
    Separate account means a legally segregated pool of assets owned and 
held by an insurance company and maintained separately from the 
insurance company's general account assets for the benefit of an 
individual contract holder. To be a separate account:
    (1) The account must be legally recognized as a separate account 
under applicable law;
    (2) The assets in the account must be insulated from general 
liabilities of the insurance company under applicable law in the event 
of the insurance company'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 policies; and
    (4) All investment gains and losses, net of contract fees and 
assessments, must be passed through to the contract holder, provided 
that the contract may specify conditions under which there may be a 
minimum guarantee but must not include contract terms that limit the 
maximum investment return available to the policyholder.
    Servicer cash advance facility means a facility under which the 
servicer of the underlying exposures of a securitization may advance 
cash to ensure an uninterrupted flow of payments to investors in the 
securitization, including advances made to cover foreclosure costs or 
other expenses to facilitate the timely collection of the underlying 
exposures.
    Significant investment in the capital of an unconsolidated financial 
institution means an investment in the capital of an unconsolidated 
financial institution where the national bank or Federal savings 
association owns more than 10 percent of the issued and outstanding 
common stock of the unconsolidated financial institution.
    Small Business Act means the Small Business Act (15 U.S.C. 632).
    Small Business Investment Act means the Small Business Investment 
Act of 1958 (15 U.S.C. 682).
    Sovereign means a central government (including the U.S. government) 
or an agency, department, ministry, or central bank of a central 
government.
    Sovereign default means 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.
    Sovereign exposure means:
    (1) A direct exposure to a sovereign; or
    (2) An exposure directly and unconditionally backed by the full 
faith and credit of a sovereign.
    Specific wrong-way risk means wrong-way risk that arises when 
either:
    (1) The counterparty and issuer of the collateral supporting the 
transaction; or
    (2) The counterparty and the reference asset of the transaction, are 
affiliates or are the same entity.
    Standardized market risk-weighted assets means the standardized 
measure for market risk calculated under Sec. 3.204 multiplied by 12.5.
    Standardized total risk-weighted assets means:

[[Page 37]]

    (1) The sum of:
    (i) Total risk-weighted assets for general credit risk as calculated 
under Sec. 3.31;
    (ii) Total risk-weighted assets for cleared transactions and default 
fund contributions as calculated under Sec. 3.35;
    (iii) Total risk-weighted assets for unsettled transactions as 
calculated under Sec. 3.38;
    (iv) Total risk-weighted assets for securitization exposures as 
calculated under Sec. 3.42;
    (v) Total risk-weighted assets for equity exposures as calculated 
under Secs. 3.52 and 3.53; and
    (vi) For a market risk national bank or Federal savings association 
only, standardized market risk-weighted assets; minus
    (2) Any amount of the national bank's or Federal savings 
association's allowance for loan and lease losses that is not included 
in tier 2 capital and any amount of allocated transfer risk reserves.
    Statutory multifamily mortgage means a loan secured by a multifamily 
residential property that meets the requirements under section 618(b)(1) 
of the Resolution Trust Corporation Refinancing, Restructuring, and 
Improvement Act of 1991, and that meets the following criteria: \5\
---------------------------------------------------------------------------

    \5\ The types of loans that qualify as loans secured by multifamily 
residential properties are listed in the instructions for preparation of 
the Call Report.
---------------------------------------------------------------------------

    (1) The loan is made in accordance with prudent underwriting 
standards;
    (2) The principal amount of the loan at origination does not exceed 
80 percent of the value of the property (or 75 percent of the value of 
the property if the loan is based on an interest rate that changes over 
the term of the loan) where the value of the property is the lower of 
the acquisition cost of the property or the appraised (or, if 
appropriate, evaluated) value of the property;
    (3) All principal and interest payments on the loan must have been 
made on a timely basis in accordance with the terms of the loan for at 
least one year prior to applying a 50 percent risk weight to the loan, 
or in the case where an existing owner is refinancing a loan on the 
property, all principal and interest payments on the loan being 
refinanced must have been made on a timely basis in accordance with the 
terms of the loan for at least one year prior to applying a 50 percent 
risk weight to the loan;
    (4) Amortization of principal and interest on the loan must occur 
over a period of not more than 30 years and the minimum original 
maturity for repayment of principal must not be less than 7 years;
    (5) Annual net operating income (before making any payment on the 
loan) generated by the property securing the loan during its most recent 
fiscal year must not be less than 120 percent of the loan's current 
annual debt service (or 115 percent of current annual debt service if 
the loan is based on an interest rate that changes over the term of the 
loan) or, in the case of a cooperative or other not-for-profit housing 
project, the property must generate sufficient cash flow to provide 
comparable protection to the national bank or Federal savings 
association; and
    (6) The loan is not more than 90 days past due, or on nonaccrual.
    Subsidiary means, with respect to a company, a company controlled by 
that company.
    Synthetic exposure means an exposure whose value is linked to the 
value of an investment in the national bank's or Federal savings 
association's own capital instrument or to the value of an investment in 
the capital of an unconsolidated financial institution.
    Synthetic securitization means a transaction in which:
    (1) All or a portion of the credit risk of one or more underlying 
exposures is retained or 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,

[[Page 38]]

credit derivatives, guarantees, receivables, asset-backed securities, 
mortgage-backed securities, other debt securities, or equity 
securities).
    Tangible capital means the amount of core capital (tier 1 capital), 
as calculated in accordance with subpart B of this part, plus the amount 
of outstanding perpetual preferred stock (including related surplus) not 
included in tier 1 capital.
    Tier 1 capital means the sum of common equity tier 1 capital and 
additional tier 1 capital.
    Tier 1 minority interest means the tier 1 capital of a consolidated 
subsidiary of a national bank or Federal savings association that is not 
owned by the national bank or Federal savings association.
    Tier 2 capital is defined in Sec. 3.20(d).
    Total capital means the sum of tier 1 capital and tier 2 capital.
    Total capital minority interest means the total capital of a 
consolidated subsidiary of a national bank or Federal savings 
association that is not owned by the national bank or Federal savings 
association.
    Total leverage exposure means the sum of the following:
    (1) The balance sheet carrying value of all of the national bank's 
or Federal savings association's on-balance sheet assets, less amounts 
deducted from tier 1 capital under Sec. 3.22(a), (c), and (d);
    (2) The potential future credit exposure (PFE) amount for each 
derivative contract to which the national bank or Federal savings 
association is a counterparty (or each single-product netting set of 
such transactions) determined in accordance with Sec. 3.34, but without 
regard to Sec. 3.34(b);
    (3) 10 percent of the notional amount of unconditionally cancellable 
commitments made by the national bank or Federal savings association; 
and
    (4) The notional amount of all other off-balance sheet exposures of 
the national bank or Federal savings association (excluding securities 
lending, securities borrowing, reverse repurchase transactions, 
derivatives and unconditionally cancellable commitments).
    Traditional securitization means a transaction in which:
    (1) All or a portion of the credit risk of one or more underlying 
exposures is transferred to one or more third parties other than through 
the use of credit derivatives or guarantees;
    (2) The credit risk associated with the underlying exposures has 
been separated into at least two tranches reflecting different levels of 
seniority;
    (3) Performance of the securitization exposures depends upon the 
performance of the underlying exposures;
    (4) All or substantially all of the underlying exposures are 
financial exposures (such as loans, commitments, credit derivatives, 
guarantees, receivables, asset-backed securities, mortgage-backed 
securities, other debt securities, or equity securities);
    (5) The underlying exposures are not owned by an operating company;
    (6) The underlying exposures are not owned by a small business 
investment company defined in section 302 of the Small Business 
Investment Act;
    (7) The underlying exposures are not owned by a firm an investment 
in which qualifies as a community development investment under section 
24(Eleventh) of the National Bank Act;
    (8) The OCC may determine that a transaction in which the underlying 
exposures are owned by an investment firm that exercises substantially 
unfettered control over the size and composition of its assets, 
liabilities, and off-balance sheet exposures is not a traditional 
securitization based on the transaction's leverage, risk profile, or 
economic substance;
    (9) The OCC may deem a transaction that meets the definition of a 
traditional securitization, notwithstanding paragraph (5), (6), or (7) 
of this definition, to be a traditional securitization based on the 
transaction's leverage, risk profile, or economic substance; and
    (10) The transaction is not:
    (i) An investment fund;
    (ii) A collective investment fund (as defined in 12 CFR 9.18 
(national banks), 12 CFR 151.40 (Federal saving associations);
    (iii) An employee benefit plan (as defined in paragraphs (3) and 
(32) of section 3 of ERISA), a ``governmental plan'' (as defined in 29 
U.S.C. 1002(32)) that complies with the tax deferral qualification 
requirements provided in the Internal Revenue Code, or any

[[Page 39]]

similar employee benefit plan established under the laws of a foreign 
jurisdiction;
    (iv) A synthetic exposure to the capital of a financial institution 
to the extent deducted from capital under Sec. 3.22; or
    (v) Registered with the SEC under the Investment Company Act of 1940 
(15 U.S.C. 80a-1) or foreign equivalents thereof.
    Tranche means all securitization exposures associated with a 
securitization that have the same seniority level.
    Two-way market means 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.
    Unconditionally cancelable means with respect to a commitment, that 
a national bank or Federal savings association may, at any time, with or 
without cause, refuse to extend credit under the commitment (to the 
extent permitted under applicable law).
    Underlying exposures means one or more exposures that have been 
securitized in a securitization transaction.
    Unregulated financial institution means, for purposes of Sec. 3.131, 
a financial institution that is not a regulated financial institution, 
including any financial institution that would meet the definition of 
``financial institution'' under this section but for the ownership 
interest thresholds set forth in paragraph (4)(i) of that definition.
    U.S. Government agency means 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.
    Value-at-Risk (VaR) means the estimate of the maximum amount that 
the value of one or more exposures could decline due to market price or 
rate movements during a fixed holding period within a stated confidence 
interval.
    Wrong-way risk means the risk that arises when an exposure to a 
particular counterparty is positively correlated with the probability of 
default of such counterparty itself.



Sec. 3.3  Operational requirements for counterparty credit risk.

    For purposes of calculating risk-weighted assets under subparts D 
and E of this part:
    (a) Cleared transaction. In order to recognize certain exposures as 
cleared transactions pursuant to paragraphs (1)(ii), (iii) or (iv) of 
the definition of ``cleared transaction'' in Sec. 3.2, the exposures 
must meet the applicable requirements set forth in this paragraph (a).
    (1) The offsetting transaction must be identified by the CCP as a 
transaction for the clearing member client.
    (2) The collateral supporting the transaction must be held in a 
manner that prevents the national bank or Federal savings association 
from facing any loss due to an event of default, including from a 
liquidation, receivership, insolvency, or similar proceeding of either 
the clearing member or the clearing member's other clients. Omnibus 
accounts established under 17 CFR parts 190 and 300 satisfy the 
requirements of this paragraph (a).
    (3) The national bank or Federal savings association must conduct 
sufficient legal review to conclude with a well-founded basis (and 
maintain sufficient written documentation of that legal review) that in 
the event of a legal challenge (including one resulting from a default 
or receivership, insolvency, liquidation, or similar proceeding) the 
relevant court and administrative authorities would find the 
arrangements of paragraph (a)(2) of this section to be legal, valid, 
binding and enforceable under the law of the relevant jurisdictions.
    (4) The offsetting transaction with a clearing member must be 
transferable under the transaction documents and applicable laws in the 
relevant jurisdiction(s) to another clearing member should the clearing 
member default, become insolvent, or enter receivership, insolvency, 
liquidation, or similar proceedings.

[[Page 40]]

    (b) Eligible margin loan. In order to recognize an exposure as an 
eligible margin loan as defined in Sec. 3.2, a national bank or Federal 
savings association must conduct sufficient legal review to conclude 
with a well-founded basis (and maintain sufficient written documentation 
of that legal review) that the agreement underlying the exposure:
    (1) Meets the requirements of paragraph (1)(iii) of the definition 
of eligible margin loan in Sec. 3.2, and
    (2) Is legal, valid, binding, and enforceable under applicable law 
in the relevant jurisdictions.
    (c) Qualifying cross-product master netting agreement. In order to 
recognize an agreement as a qualifying cross-product master netting 
agreement as defined in Sec. 3.101, a national bank or Federal savings 
association must obtain a written legal opinion verifying the validity 
and enforceability of the agreement under applicable law of the relevant 
jurisdictions if the counterparty fails to perform upon an event of 
default, including upon receivership, insolvency, liquidation, or 
similar proceeding.
    (d) Qualifying master netting agreement. In order to recognize an 
agreement as a qualifying master netting agreement as defined in 
Sec. 3.2, a national bank or Federal savings association must:
    (1) Conduct sufficient legal review to conclude with a well-founded 
basis (and maintain sufficient written documentation of that legal 
review) that:
    (i) The agreement meets the requirements of paragraph (2) of the 
definition of qualifying master netting agreement in Sec. 3.2; and
    (ii) In the event of a legal challenge (including one resulting from 
default or from receivership, insolvency, liquidation, or similar 
proceeding) the relevant court and administrative authorities would find 
the agreement to be legal, valid, binding, and enforceable under the law 
of the relevant jurisdictions; and
    (2) Establish and maintain written procedures to monitor possible 
changes in relevant law and to ensure that the agreement continues to 
satisfy the requirements of the definition of qualifying master netting 
agreement in Sec. 3.2.
    (e) Repo-style transaction. In order to recognize an exposure as a 
repo-style transaction as defined in Sec. 3.2, a national bank or 
Federal savings association must conduct sufficient legal review to 
conclude with a well-founded basis (and maintain sufficient written 
documentation of that legal review) that the agreement underlying the 
exposure:
    (1) Meets the requirements of paragraph (3) of the definition of 
repo-style transaction in Sec. 3.2, and
    (2) Is legal, valid, binding, and enforceable under applicable law 
in the relevant jurisdictions.
    (f) Failure of a QCCP to satisfy the rule's requirements. If a 
national bank or Federal savings association determines that a CCP 
ceases to be a QCCP due to the failure of the CCP to satisfy one or more 
of the requirements set forth in paragraphs (2)(i) through (2)(iii) of 
the definition of a QCCP in Sec. 3.2, the national bank or Federal 
savings association may continue to treat the CCP as a QCCP for up to 
three months following the determination. If the CCP fails to remedy the 
relevant deficiency within three months after the initial determination, 
or the CCP fails to satisfy the requirements set forth in paragraphs 
(2)(i) through (2)(iii) of the definition of a QCCP continuously for a 
three-month period after remedying the relevant deficiency, a national 
bank or Federal savings association may not treat the CCP as a QCCP for 
the purposes of this part until after the national bank or Federal 
savings association has determined that the CCP has satisfied the 
requirements in paragraphs (2)(i) through (2)(iii) of the definition of 
a QCCP for three continuous months.



Secs. 3.4-3.9  [Reserved]



            Subpart B_Capital Ratio Requirements and Buffers

    Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted.



Sec. 3.10  Minimum capital requirements.

    (a) Minimum capital requirements. A national bank or Federal savings 
association must maintain the following minimum capital ratios:

[[Page 41]]

    (1) A common equity tier 1 capital ratio of 4.5 percent.
    (2) A tier 1 capital ratio of 6 percent.
    (3) A total capital ratio of 8 percent.
    (4) A leverage ratio of 4 percent.
    (5) For advanced approaches national banks or Federal savings 
associations, a supplementary leverage ratio of 3 percent.
    (6) For Federal savings associations, a tangible capital ratio of 
1.5 percent.
    (b) Standardized capital ratio calculations. Other than as provided 
in paragraph (c) of this section:
    (1) Common equity tier 1 capital ratio. A national bank's or Federal 
savings association's common equity tier 1 capital ratio is the ratio of 
the national bank's or Federal savings association's common equity tier 
1 capital to standardized total risk-weighted assets;
    (2) Tier 1 capital ratio. A national bank's or Federal savings 
association's tier 1 capital ratio is the ratio of the national bank's 
or Federal savings association's tier 1 capital to standardized total 
risk-weighted assets;
    (3) Total capital ratio. A national bank's or Federal savings 
association's total capital ratio is the ratio of the national bank's or 
Federal savings association's total capital to standardized total risk-
weighted assets; and
    (4) Leverage ratio. A national bank's or Federal savings 
association's leverage ratio is the ratio of the national bank's or 
Federal savings association's tier 1 capital to the national bank's or 
Federal savings association's average total consolidated assets as 
reported on the national bank's or Federal savings association's Call 
Report minus amounts deducted from tier 1 capital under Sec. 3.22(a), 
(c) and (d).
    (5) Federal savings association tangible capital ratio. A Federal 
savings association's tangible capital ratio is the ratio of the Federal 
savings association's core capital (tier 1 capital) to average total 
assets as calculated under this subpart B. For purposes of this 
paragraph (b)(5), the term ``total assets'' means ``total assets'' as 
defined in part 6, subpart A of this chapter, subject to subpart G of 
this part.
    (c) Advanced approaches capital ratio calculations. An advanced 
approaches national bank or Federal savings association that has 
completed the parallel run process and received notification from the 
OCC pursuant to Sec. 3.121(d) must determine its regulatory capital 
ratios as described in this paragraph (c).
    (1) Common equity tier 1 capital ratio. The national bank's or 
Federal savings association's common equity tier 1 capital ratio is the 
lower of:
    (i) The ratio of the national bank's or Federal savings 
association's common equity tier 1 capital to standardized total risk-
weighted assets; and
    (ii) The ratio of the national bank's or Federal savings 
association's common equity tier 1 capital to advanced approaches total 
risk-weighted assets.
    (2) Tier 1 capital ratio. The national bank's or Federal savings 
association's tier 1 capital ratio is the lower of:
    (i) The ratio of the national bank's or Federal savings 
association's tier 1 capital to standardized total risk-weighted assets; 
and
    (ii) The ratio of the national bank's or Federal savings 
association's tier 1 capital to advanced approaches total risk-weighted 
assets.
    (3) Total capital ratio. The national bank's or Federal savings 
association's total capital ratio is the lower of:
    (i) The ratio of the national bank's or Federal savings 
association's total capital to standardized total risk-weighted assets; 
and
    (ii) The ratio of the national bank's or Federal savings 
association's advanced-approaches-adjusted total capital to advanced 
approaches total risk-weighted assets. A national bank's or Federal 
savings association's advanced-approaches-adjusted total capital is the 
national bank's or Federal savings association's total capital after 
being adjusted as follows:
    (A) An advanced approaches national bank or Federal savings 
association must deduct from its total capital any allowance for loan 
and lease losses included in its tier 2 capital in accordance with 
Sec. 3.20(d)(3); and
    (B) An advanced approaches national bank or Federal savings 
association must add to its total capital any eligible credit reserves 
that exceed the national bank's or Federal savings association's total 
expected credit losses to the extent that the excess reserve amount does 
not exceed 0.6 percent of

[[Page 42]]

the national bank's or Federal savings association's credit risk-
weighted assets.
    (4) Supplementary leverage ratio. An advanced approaches national 
bank's or Federal savings association's supplementary leverage ratio is 
the simple arithmetic mean of the ratio of its tier 1 capital to total 
leverage exposure calculated as of the last day of each month in the 
reporting quarter.
    (5) Federal savings association tangible capital ratio. A Federal 
savings association's tangible capital ratio is the ratio of the Federal 
savings association's core capital (tier 1 capital) to average total 
assets as calculated under this subpart B. For purposes of this 
paragraph (c)(5), the term ``total assets'' means ``total assets'' as 
defined in part 6, subpart A of this chapter, subject to subpart G of 
this part.
    (d) Capital adequacy. (1) Notwithstanding the minimum requirements 
in this part, a national bank or Federal savings association must 
maintain capital commensurate with the level and nature of all risks to 
which the national bank or Federal savings association is exposed. The 
supervisory evaluation of a national bank's or Federal savings 
association's capital adequacy is based on an individual assessment of 
numerous factors, including those listed at this section (national 
banks), 12 CFR 167.3(c) (Federal savings associations).
    (2) A national bank or Federal savings association must have a 
process for assessing its overall capital adequacy in relation to its 
risk profile and a comprehensive strategy for maintaining an appropriate 
level of capital.



Sec. 3.11  Capital conservation buffer and countercyclical capital
buffer amount.

    (a) Capital conservation buffer. (1) Composition of the capital 
conservation buffer. The capital conservation buffer is composed solely 
of common equity tier 1 capital.
    (2) Definitions. For purposes of this section, the following 
definitions apply:
    (i) Eligible retained income. The eligible retained income of a 
national bank or Federal savings association is the national bank's or 
Federal savings association's net income for the four calendar quarters 
preceding the current calendar quarter, based on the national bank's or 
Federal savings association's quarterly Call Reports, net of any 
distributions and associated tax effects not already reflected in net 
income.
    (ii) Maximum payout ratio. The maximum payout ratio is the 
percentage of eligible retained income that a national bank or Federal 
savings association can pay out in the form of distributions and 
discretionary bonus payments during the current calendar quarter. The 
maximum payout ratio is based on the national bank's or Federal savings 
association's capital conservation buffer, calculated as of the last day 
of the previous calendar quarter, as set forth in Table 1 to Sec. 3.11.
    (iii) Maximum payout amount. A national bank's or Federal savings 
association's maximum payout amount for the current calendar quarter is 
equal to the national bank's or Federal savings association's eligible 
retained income, multiplied by the applicable maximum payout ratio, as 
set forth in Table 1 to Sec. 3.11.
    (iv) Private sector credit exposure. Private sector credit exposure 
means an exposure to a company or an individual that is not an exposure 
to a sovereign, the Bank for International Settlements, the European 
Central Bank, the European Commission, the International Monetary Fund, 
a MDB, a PSE, or a GSE.
    (3) Calculation of capital conservation buffer. (i) A national 
bank's or Federal savings association's capital conservation buffer is 
equal to the lowest of the following ratios, calculated as of the last 
day of the previous calendar quarter based on the national bank's or 
Federal savings association's most recent Call Report:
    (A) The national bank's or Federal savings association's common 
equity tier 1 capital ratio minus the national bank's or Federal savings 
association's minimum common equity tier 1 capital ratio requirement 
under Sec. 3.10;
    (B) The national bank's or Federal savings association's tier 1 
capital ratio minus the national bank's or Federal savings association's 
minimum tier 1 capital ratio requirement under Sec. 3.10; and

[[Page 43]]

    (C) The national bank's or Federal savings association's total 
capital ratio minus the national bank's or Federal savings association's 
minimum total capital ratio requirement under Sec. 3.10; or
    (ii) Notwithstanding paragraphs (a)(3)(i)(A)-(C) of this section, if 
the national bank's or Federal savings association's common equity tier 
1, tier 1 or total capital ratio is less than or equal to the national 
bank's or Federal savings association's minimum common equity tier 1, 
tier 1 or total capital ratio requirement under Sec. 3.10, respectively, 
the national bank's or Federal savings association's capital 
conservation buffer is zero.
    (4) Limits on distributions and discretionary bonus payments. (i) A 
national bank or Federal savings association shall not make 
distributions or discretionary bonus payments or create an obligation to 
make such distributions or payments during the current calendar quarter 
that, in the aggregate, exceed the maximum payout amount.
    (ii) A national bank or Federal savings association with a capital 
conservation buffer that is greater than 2.5 percent plus 100 percent of 
its applicable countercyclical capital buffer, in accordance with 
paragraph (b) of this section, is not subject to a maximum payout amount 
under this section.
    (iii) Negative eligible retained income. Except as provided in 
paragraph (a)(4)(iv) of this section, a national bank or Federal savings 
association may not make distributions or discretionary bonus payments 
during the current calendar quarter if the national bank's or Federal 
savings association's:
    (A) Eligible retained income is negative; and
    (B) Capital conservation buffer was less than 2.5 percent as of the 
end of the previous calendar quarter.
    (iv) Prior approval. Notwithstanding the limitations in paragraphs 
(a)(4)(i) through (iii) of this section, the OCC may permit a national 
bank or Federal savings association to make a distribution or 
discretionary bonus payment upon a request of the national bank or 
Federal savings association, if the OCC determines that the distribution 
or discretionary bonus payment would not be contrary to the purposes of 
this section, or to the safety and soundness of the national bank or 
Federal savings association. In making such a determination, the OCC 
will consider the nature and extent of the request and the particular 
circumstances giving rise to the request.

       Table 1 toSec. 3.11--Calculation of Maximum Payout Amount
------------------------------------------------------------------------
                                   Maximum payout ratio (as a percentage
   Capital conservation buffer          of eligible retained income)
------------------------------------------------------------------------
Greater than 2.5 percent plus 100  No payout ratio limitation applies.
 percent of the national bank's
 or Federal savings association's
 applicable countercyclical
 capital buffer amount.
Less than or equal to 2.5 percent  60 percent.
 plus 100 percent of the national
 bank's or Federal savings
 association's applicable
 countercyclical capital buffer
 amount, and greater than 1.875
 percent plus 75 percent of the
 national bank's or Federal
 savings association's applicable
 countercyclical capital buffer
 amount.
Less than or equal to 1.875        40 percent.
 percent plus 75 percent of the
 national bank's or Federal
 savings association's applicable
 countercyclical capital buffer
 amount, and greater than 1.25
 percent plus 50 percent of the
 national bank's or Federal
 savings association's applicable
 countercyclical capital buffer
 amount.
Less than or equal to 1.25         20 percent.
 percent plus 50 percent of the
 national bank's or Federal
 savings association's applicable
 countercyclical capital buffer
 amount, and greater than 0.625
 percent plus 25 percent of the
 national bank's or Federal
 savings association's applicable
 countercyclical capital buffer
 amount.
Less than or equal to 0.625        0 percent.
 percent plus 25 percent of the
 national bank's or Federal
 savings association's applicable
 countercyclical capital buffer
 amount.
------------------------------------------------------------------------

    (v) Other limitations on distributions. Additional limitations on 
distributions may apply to a national bank or Federal savings 
association under subparts H and I of this part; 12 CFR 5.46, 12 CFR 
part 5, subpart E; 12 CFR part 6.

[[Page 44]]

    (b) Countercyclical capital buffer amount. (1) General. An advanced 
approaches national bank or Federal savings association must calculate a 
countercyclical capital buffer amount in accordance with the following 
paragraphs for purposes of determining its maximum payout ratio under 
Table 1 to Sec. 3.11.
    (i) Extension of capital conservation buffer. The countercyclical 
capital buffer amount is an extension of the capital conservation buffer 
as described in paragraph (a) of this section.
    (ii) Amount. An advanced approaches national bank or Federal savings 
association has a countercyclical capital buffer amount determined by 
calculating the weighted average of the countercyclical capital buffer 
amounts established for the national jurisdictions where the national 
bank's or Federal savings association's private sector credit exposures 
are located, as specified in paragraphs (b)(2) and (3) of this section.
    (iii) Weighting. The weight assigned to a jurisdiction's 
countercyclical capital buffer amount is calculated by dividing the 
total risk-weighted assets for the national bank's or Federal savings 
association's private sector credit exposures located in the 
jurisdiction by the total risk-weighted assets for all of the national 
bank's or Federal savings association's private sector credit exposures. 
The methodology a national bank or Federal savings association uses for 
determining risk-weighted assets for purposes of this paragraph (b) must 
be the methodology that determines its risk-based capital ratios under 
Sec. 3.10. Notwithstanding the previous sentence, the risk-weighted 
asset amount for a private sector credit exposure that is a covered 
position under subpart F of this part is its specific risk add-on as 
determined under Sec. 3.210 multiplied by 12.5.
    (iv) Location. (A) Except as provided in paragraphs (b)(1)(iv)(B) 
and (b)(1)(iv)(C) of this section, the location of a private sector 
credit exposure is the national jurisdiction where the borrower is 
located (that is, where it is incorporated, chartered, or similarly 
established or, if the borrower is an individual, where the borrower 
resides).
    (B) If, in accordance with subparts D or E of this part, the 
national bank or Federal savings association has assigned to a private 
sector credit exposure a risk weight associated with a protection 
provider on a guarantee or credit derivative, the location of the 
exposure is the national jurisdiction where the protection provider is 
located.
    (C) The location of a securitization exposure is the location of the 
underlying exposures, or, if the underlying exposures are located in 
more than one national jurisdiction, the national jurisdiction where the 
underlying exposures with the largest aggregate unpaid principal balance 
are located. For purposes of this paragraph (b), the location of an 
underlying exposure shall be the location of the borrower, determined 
consistent with paragraph (b)(1)(iv)(A) of this section.
    (2) Countercyclical capital buffer amount for credit exposures in 
the United States--(i) Initial countercyclical capital buffer amount 
with respect to credit exposures in the United States. The initial 
countercyclical capital buffer amount in the United States is zero.
    (ii) Adjustment of the countercyclical capital buffer amount. The 
OCC will adjust the countercyclical capital buffer amount for credit 
exposures in the United States in accordance with applicable law.\6\
---------------------------------------------------------------------------

    \6\ The OCC expects that any adjustment will be based on a 
determination made jointly by the Board, OCC, and FDIC.
---------------------------------------------------------------------------

    (iii) Range of countercyclical capital buffer amount. The OCC will 
adjust the countercyclical capital buffer amount for credit exposures in 
the United States between zero percent and 2.5 percent of risk-weighted 
assets.
    (iv) Adjustment determination. The OCC will base its decision to 
adjust the countercyclical capital buffer amount under this section on a 
range of macroeconomic, financial, and supervisory information 
indicating an increase in systemic risk including, but not limited to, 
the ratio of credit to gross domestic product, a variety of asset 
prices, other factors indicative of relative credit and liquidity 
expansion or contraction, funding spreads, credit condition surveys, 
indices based on

[[Page 45]]

credit default swap spreads, options implied volatility, and measures of 
systemic risk.
    (v) Effective date of adjusted countercyclical capital buffer 
amount. (A) Increase adjustment. A determination by the OCC under 
paragraph (b)(2)(ii) of this section to increase the countercyclical 
capital buffer amount will be effective 12 months from the date of 
announcement, unless the OCC establishes an earlier effective date and 
includes a statement articulating the reasons for the earlier effective 
date.
    (B) Decrease adjustment. A determination by the OCC to decrease the 
established countercyclical capital buffer amount under paragraph 
(b)(2)(ii) of this section will be effective on the day following 
announcement of the final determination or the earliest date permissible 
under applicable law or regulation, whichever is later.
    (vi) Twelve month sunset. The countercyclical capital buffer amount 
will return to zero percent 12 months after the effective date that the 
adjusted countercyclical capital buffer amount is announced, unless the 
OCC announces a decision to maintain the adjusted countercyclical 
capital buffer amount or adjust it again before the expiration of the 
12-month period.
    (3) Countercyclical capital buffer amount for foreign jurisdictions. 
The OCC will adjust the countercyclical capital buffer amount for 
private sector credit exposures to reflect decisions made by foreign 
jurisdictions consistent with due process requirements described in 
paragraph (b)(2) of this section.

[78 FR 62157, 62273, 62274, Oct. 11, 2013]



Secs. 3.12-3.19  [Reserved]



                     Subpart C_Definition of Capital

    Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted.



Sec. 3.20  Capital components and eligibility criteria for regulatory
capital instruments.

    (a) Regulatory capital components. A national bank's or Federal 
savings association's regulatory capital components are:
    (1) Common equity tier 1 capital;
    (2) Additional tier 1 capital; and
    (3) Tier 2 capital.
    (b) Common equity tier 1 capital. Common equity tier 1 capital is 
the sum of the common equity tier 1 capital elements in this paragraph 
(b), minus regulatory adjustments and deductions in Sec. 3.22. The 
common equity tier 1 capital elements are:
    (1) Any common stock instruments (plus any related surplus) issued 
by the national bank or Federal savings association, net of treasury 
stock, and any capital instruments issued by mutual banking 
organizations, that meet all the following criteria:
    (i) The instrument is paid-in, issued directly by the national bank 
or Federal savings association, and represents the most subordinated 
claim in a receivership, insolvency, liquidation, or similar proceeding 
of the national bank or Federal savings association;
    (ii) The holder of the instrument is entitled to a claim on the 
residual assets of the national bank or Federal savings association that 
is proportional with the holder's share of the national bank's or 
Federal savings association's issued capital after all senior claims 
have been satisfied in a receivership, insolvency, liquidation, or 
similar proceeding;
    (iii) The instrument has no maturity date, can only be redeemed via 
discretionary repurchases with the prior approval of the OCC, and does 
not contain any term or feature that creates an incentive to redeem;
    (iv) The national bank or Federal savings association did not create 
at issuance of the instrument through any action or communication an 
expectation that it will buy back, cancel, or redeem the instrument, and 
the instrument does not include any term or feature that might give rise 
to such an expectation;
    (v) Any cash dividend payments on the instrument are paid out of the 
national bank's or Federal savings association's net income or retained 
earnings and are not subject to a limit imposed by the contractual terms 
governing the instrument.
    (vi) The national bank or Federal savings association has full 
discretion at all times to refrain from paying any dividends and making 
any other distributions on the instrument without

[[Page 46]]

triggering an event of default, a requirement to make a payment-in-kind, 
or an imposition of any other restrictions on the national bank or 
Federal savings association;
    (vii) Dividend payments and any other distributions on the 
instrument may be paid only after all legal and contractual obligations 
of the national bank or Federal savings association have been satisfied, 
including payments due on more senior claims;
    (viii) The holders of the instrument bear losses as they occur 
equally, proportionately, and simultaneously with the holders of all 
other common stock instruments before any losses are borne by holders of 
claims on the national bank or Federal savings association with greater 
priority in a receivership, insolvency, liquidation, or similar 
proceeding;
    (ix) The paid-in amount is classified as equity under GAAP;
    (x) The national bank or Federal savings association, or an entity 
that the national bank or Federal savings association controls, did not 
purchase or directly or indirectly fund the purchase of the instrument;
    (xi) The instrument is not secured, not covered by a guarantee of 
the national bank or Federal savings association or of an affiliate of 
the national bank or Federal savings association, and is not subject to 
any other arrangement that legally or economically enhances the 
seniority of the instrument;
    (xii) The instrument has been issued in accordance with applicable 
laws and regulations; and
    (xiii) The instrument is reported on the national bank's or Federal 
savings association's regulatory financial statements separately from 
other capital instruments.
    (2) Retained earnings.
    (3) Accumulated other comprehensive income (AOCI) as reported under 
GAAP.\7\
---------------------------------------------------------------------------

    \7\ See Sec. 3.22 for specific adjustments related to AOCI.
---------------------------------------------------------------------------

    (4) Any common equity tier 1 minority interest, subject to the 
limitations in Sec. 3.21(c).
    (5) Notwithstanding the criteria for common stock instruments 
referenced above, a national bank's or Federal savings association's 
common stock issued and held in trust for the benefit of its employees 
as part of an employee stock ownership plan does not violate any of the 
criteria in paragraph (b)(1)(iii), paragraph (b)(1)(iv) or paragraph 
(b)(1)(xi) of this section, provided that any repurchase of the stock is 
required solely by virtue of ERISA for an instrument of a national bank 
or Federal savings association that is not publicly-traded. In addition, 
an instrument issued by a national bank or Federal savings association 
to its employee stock ownership plan does not violate the criterion in 
paragraph (b)(1)(x) of this section.
    (c) Additional tier 1 capital. Additional tier 1 capital is the sum 
of additional tier 1 capital elements and any related surplus, minus the 
regulatory adjustments and deductions in Sec. 3.22. Additional tier 1 
capital elements are:
    (1) Instruments (plus any related surplus) that meet the following 
criteria:
    (i) The instrument is issued and paid-in;
    (ii) The instrument is subordinated to depositors, general 
creditors, and subordinated debt holders of the national bank or Federal 
savings association in a receivership, insolvency, liquidation, or 
similar proceeding;
    (iii) The instrument is not secured, not covered by a guarantee of 
the national bank or Federal savings association or of an affiliate of 
the national bank or Federal savings association, and not subject to any 
other arrangement that legally or economically enhances the seniority of 
the instrument;
    (iv) The instrument has no maturity date and does not contain a 
dividend step-up or any other term or feature that creates an incentive 
to redeem; and
    (v) If callable by its terms, the instrument may be called by the 
national bank or Federal savings association only after a minimum of 
five years following issuance, except that the terms of the instrument 
may allow it to be called earlier than five years upon the occurrence of 
a regulatory event that precludes the instrument from being included in 
additional tier 1 capital, a tax event, or if the issuing entity is 
required to register as an investment

[[Page 47]]

company pursuant to the Investment Company Act of 1940 (15 U.S.C. 80a-1 
et seq.). In addition:
    (A) The national bank or Federal savings association must receive 
prior approval from the OCC to exercise a call option on the instrument.
    (B) The national bank or Federal savings association does not create 
at issuance of the instrument, through any action or communication, an 
expectation that the call option will be exercised.
    (C) Prior to exercising the call option, or immediately thereafter, 
the national bank or Federal savings association must either: Replace 
the instrument to be called with an equal amount of instruments that 
meet the criteria under paragraph (b) of this section or this paragraph 
(c); \8\ or demonstrate to the satisfaction of the OCC that following 
redemption, the national bank or Federal savings association will 
continue to hold capital commensurate with its risk.
---------------------------------------------------------------------------

    \8\ Replacement can be concurrent with redemption of existing 
additional tier 1 capital instruments.
---------------------------------------------------------------------------

    (vi) Redemption or repurchase of the instrument requires prior 
approval from the OCC.
    (vii) The national bank or Federal savings association has full 
discretion at all times to cancel dividends or other distributions on 
the instrument without triggering an event of default, a requirement to 
make a payment-in-kind, or an imposition of other restrictions on the 
national bank or Federal savings association except in relation to any 
distributions to holders of common stock or instruments that are pari 
passu with the instrument.
    (viii) Any cash dividend payments on the instrument are paid out of 
the national bank's or Federal savings association's net income or 
retained earnings and are not subject to a limit imposed by the 
contractual terms governing the instrument.
    (ix) The instrument does not have a credit-sensitive feature, such 
as a dividend rate that is reset periodically based in whole or in part 
on the national bank's or Federal savings association's credit quality, 
but may have a dividend rate that is adjusted periodically independent 
of the national bank's or Federal savings association's credit quality, 
in relation to general market interest rates or similar adjustments.
    (x) The paid-in amount is classified as equity under GAAP.
    (xi) The national bank or Federal savings association, or an entity 
that the national bank or Federal savings association controls, did not 
purchase or directly or indirectly fund the purchase of the instrument.
    (xii) The instrument does not have any features that would limit or 
discourage additional issuance of capital by the national bank or 
Federal savings association, such as provisions that require the 
national bank or Federal savings association to compensate holders of 
the instrument if a new instrument is issued at a lower price during a 
specified time frame.
    (xiii) If the instrument is not issued directly by the national bank 
or Federal savings association or by a subsidiary of the national bank 
or Federal savings association that is an operating entity, the only 
asset of the issuing entity is its investment in the capital of the 
national bank or Federal savings association, and proceeds must be 
immediately available without limitation to the national bank or Federal 
savings association or to the national bank's or Federal savings 
association's top-tier holding company in a form which meets or exceeds 
all of the other criteria for additional tier 1 capital instruments.\9\
---------------------------------------------------------------------------

    \9\ De minimis assets related to the operation of the issuing entity 
can be disregarded for purposes of this criterion.
---------------------------------------------------------------------------

    (xiv) For an advanced approaches national bank or Federal savings 
association, the governing agreement, offering circular, or prospectus 
of an instrument issued after the date upon which the national bank or 
Federal savings association becomes subject to this part as set forth in 
Sec. 3.1(f) must disclose that the holders of the instrument may be 
fully subordinated to interests held by the U.S. government in the event 
that the national bank or Federal savings association enters into a 
receivership, insolvency, liquidation, or similar proceeding.

[[Page 48]]

    (2) Tier 1 minority interest, subject to the limitations in 
Sec. 3.21(d), that is not included in the national bank's or Federal 
savings association's common equity tier 1 capital.
    (3) Any and all instruments that qualified as tier 1 capital under 
the OCC's general risk-based capital rules under appendix A to this part 
(national banks), 12 CFR part 167 (Federal savings associations) as then 
in effect, that were issued under the Small Business Jobs Act of 2010 
\10\ or prior to October 4, 2010, under the Emergency Economic 
Stabilization Act of 2008.\11\
---------------------------------------------------------------------------

    \10\ Public Law 111-240; 124 Stat. 2504 (2010).
    \11\ Public Law 110-343, 122 Stat. 3765 (2008).
---------------------------------------------------------------------------

    (4) Notwithstanding the criteria for additional tier 1 capital 
instruments referenced above:
    (i) An instrument issued by a national bank or Federal savings 
association and held in trust for the benefit of its employees as part 
of an employee stock ownership plan does not violate any of the criteria 
in paragraph (c)(1)(iii) of this section, provided that any repurchase 
is required solely by virtue of ERISA for an instrument of a national 
bank or Federal savings association that is not publicly-traded. In 
addition, an instrument issued by a national bank or Federal savings 
association to its employee stock ownership plan does not violate the 
criteria in paragraph (c)(1)(v) or paragraph (c)(1)(xi) of this section; 
and
    (ii) An instrument with terms that provide that the instrument may 
be called earlier than five years upon the occurrence of a rating agency 
event does not violate the criterion in paragraph (c)(1)(v) of this 
section provided that the instrument was issued and included in a 
national bank's or Federal savings association's tier 1 capital prior to 
January 1, 2014, and that such instrument satisfies all other criteria 
under this Sec. 3.20(c).
    (d) Tier 2 Capital. Tier 2 capital is the sum of tier 2 capital 
elements and any related surplus, minus regulatory adjustments and 
deductions in Sec. 3.22. Tier 2 capital elements are:
    (1) Instruments (plus related surplus) that meet the following 
criteria:
    (i) The instrument is issued and paid-in;
    (ii) The instrument is subordinated to depositors and general 
creditors of the national bank or Federal savings association;
    (iii) The instrument is not secured, not covered by a guarantee of 
the national bank or Federal savings association or of an affiliate of 
the national bank or Federal savings association, and not subject to any 
other arrangement that legally or economically enhances the seniority of 
the instrument in relation to more senior claims;
    (iv) The instrument has a minimum original maturity of at least five 
years. At the beginning of each of the last five years of the life of 
the instrument, the amount that is eligible to be included in tier 2 
capital is reduced by 20 percent of the original amount of the 
instrument (net of redemptions) and is excluded from regulatory capital 
when the remaining maturity is less than one year. In addition, the 
instrument must not have any terms or features that require, or create 
significant incentives for, the national bank or Federal savings 
association to redeem the instrument prior to maturity; \12\ and
---------------------------------------------------------------------------

    \12\ An instrument that by its terms automatically converts into a 
tier 1 capital instrument prior to five years after issuance complies 
with the five-year maturity requirement of this criterion.
---------------------------------------------------------------------------

    (v) The instrument, by its terms, may be called by the national bank 
or Federal savings association only after a minimum of five years 
following issuance, except that the terms of the instrument may allow it 
to be called sooner upon the occurrence of an event that would preclude 
the instrument from being included in tier 2 capital, a tax event, or if 
the issuing entity is required to register as an investment company 
pursuant to the Investment Company Act of 1940 (15 U.S.C. 80a-1 et 
seq.). In addition:
    (A) The national bank or Federal savings association must receive 
the prior approval of the OCC to exercise a call option on the 
instrument.
    (B) The national bank or Federal savings association does not create 
at issuance, through action or communication, an expectation the call 
option will be exercised.
    (C) Prior to exercising the call option, or immediately thereafter, 
the

[[Page 49]]

national bank or Federal savings association must either: Replace any 
amount called with an equivalent amount of an instrument that meets the 
criteria for regulatory capital under this section; \13\ or demonstrate 
to the satisfaction of the OCC that following redemption, the national 
bank or Federal savings association would continue to hold an amount of 
capital that is commensurate with its risk.
---------------------------------------------------------------------------

    \13\ A national bank or Federal savings association may replace tier 
2 capital instruments concurrent with the redemption of existing tier 2 
capital instruments.
---------------------------------------------------------------------------

    (vi) The holder of the instrument must have no contractual right to 
accelerate payment of principal or interest on the instrument, except in 
the event of a receivership, insolvency, liquidation, or similar 
proceeding of the national bank or Federal savings association.
    (vii) The instrument has no credit-sensitive feature, such as a 
dividend or interest rate that is reset periodically based in whole or 
in part on the national bank's or Federal savings association's credit 
standing, but may have a dividend rate that is adjusted periodically 
independent of the national bank's or Federal savings association's 
credit standing, in relation to general market interest rates or similar 
adjustments.
    (viii) The national bank or Federal savings association, or an 
entity that the national bank or Federal savings association controls, 
has not purchased and has not directly or indirectly funded the purchase 
of the instrument.
    (ix) If the instrument is not issued directly by the national bank 
or Federal savings association or by a subsidiary of the national bank 
or Federal savings association that is an operating entity, the only 
asset of the issuing entity is its investment in the capital of the 
national bank or Federal savings association, and proceeds must be 
immediately available without limitation to the national bank or Federal 
savings association or the national bank's or Federal savings 
association's top-tier holding company in a form that meets or exceeds 
all the other criteria for tier 2 capital instruments under this 
section.\14\
---------------------------------------------------------------------------

    \14\ A national bank or Federal savings association may disregard de 
minimis assets related to the operation of the issuing entity for 
purposes of this criterion.
---------------------------------------------------------------------------

    (x) Redemption of the instrument prior to maturity or repurchase 
requires the prior approval of the OCC.
    (xi) For an advanced approaches national bank or Federal savings 
association, the governing agreement, offering circular, or prospectus 
of an instrument issued after the date on which the advanced approaches 
national bank or Federal savings association becomes subject to this 
part under Sec. 3.1(f) must disclose that the holders of the instrument 
may be fully subordinated to interests held by the U.S. government in 
the event that the national bank or Federal savings association enters 
into a receivership, insolvency, liquidation, or similar proceeding.
    (2) Total capital minority interest, subject to the limitations set 
forth in Sec. 3.21(e), that is not included in the national bank's or 
Federal savings association's tier 1 capital.
    (3) ALLL up to 1.25 percent of the national bank's or Federal 
savings association's standardized total risk-weighted assets not 
including any amount of the ALLL (and excluding in the case of a market 
risk national bank or Federal savings association, its standardized 
market risk-weighted assets).
    (4) Any instrument that qualified as tier 2 capital under the OCC's 
general risk-based capital rules under appendix A to this part, 12 CFR 
part 167 as then in effect, that were issued under the Small Business 
Jobs Act of 2010,\15\ or prior to October 4, 2010, under the Emergency 
Economic Stabilization Act of 2008.\16\
---------------------------------------------------------------------------

    \15\ Public Law 111-240; 124 Stat. 2504 (2010).
    \16\ Public Law 110-343, 122 Stat. 3765 (2008).
---------------------------------------------------------------------------

    (5) For a national bank or Federal savings association that makes an 
AOCI opt-out election (as defined in paragraph (b)(2) of this section), 
45 percent of pretax net unrealized gains on available-for-sale 
preferred stock classified as an equity security under GAAP and 
available-for-sale equity exposures.

[[Page 50]]

    (6) Notwithstanding the criteria for tier 2 capital instruments 
referenced above, an instrument with terms that provide that the 
instrument may be called earlier than five years upon the occurrence of 
a rating agency event does not violate the criterion in paragraph 
(d)(1)(v) of this section provided that the instrument was issued and 
included in a national bank's or Federal savings association's tier 1 or 
tier 2 capital prior to January 1, 2014, and that such instrument 
satisfies all other criteria under this paragraph (d).
    (e) OCC approval of a capital element. (1) A national bank or 
Federal savings association must receive OCC prior approval to include a 
capital element (as listed in this section) in its common equity tier 1 
capital, additional tier 1 capital, or tier 2 capital unless the 
element:
    (i) Was included in a national bank's or Federal savings 
association's tier 1 capital or tier 2 capital prior to May 19, 2010 in 
accordance with the OCC's risk-based capital rules that were effective 
as of that date and the underlying instrument may continue to be 
included under the criteria set forth in this section; or
    (ii) Is equivalent, in terms of capital quality and ability to 
absorb losses with respect to all material terms, to a regulatory 
capital element the OCC determined may be included in regulatory capital 
pursuant to paragraph (e)(3) of this section.
    (2) When considering whether a national bank or Federal savings 
association may include a regulatory capital element in its common 
equity tier 1 capital, additional tier 1 capital, or tier 2 capital, the 
OCC will consult with the Federal Deposit Insurance Corporation and 
Federal Reserve Board.
    (3) After determining that a regulatory capital element may be 
included in a national bank's or Federal savings association's common 
equity tier 1 capital, additional tier 1 capital, or tier 2 capital, the 
OCC will make its decision publicly available, including a brief 
description of the material terms of the regulatory capital element and 
the rationale for the determination.

[78 FR 62157, 62273, 62274, Oct. 11, 2013]



Sec. 3.21  Minority interest.

    (a) Applicability. For purposes of Sec. 3.20, a national bank or 
Federal savings association is subject to the minority interest 
limitations in this section if:
    (1) A consolidated subsidiary of the national bank or Federal 
savings association has issued regulatory capital that is not owned by 
the national bank or Federal savings association; and
    (2) For each relevant regulatory capital ratio of the consolidated 
subsidiary, the ratio exceeds the sum of the subsidiary's minimum 
regulatory capital requirements plus its capital conservation buffer.
    (b) Difference in capital adequacy standards at the subsidiary 
level. For purposes of the minority interest calculations in this 
section, if the consolidated subsidiary issuing the capital is not 
subject to capital adequacy standards similar to those of the national 
bank or Federal savings association, the national bank or Federal 
savings association must assume that the capital adequacy standards of 
the national bank or Federal savings association apply to the 
subsidiary.
    (c) Common equity tier 1 minority interest includable in the common 
equity tier 1 capital of the national bank or Federal savings 
association. For each consolidated subsidiary of a national bank or 
Federal savings association, the amount of common equity tier 1 minority 
interest the national bank or Federal savings association may include in 
common equity tier 1 capital is equal to:
    (1) The common equity tier 1 minority interest of the subsidiary; 
minus
    (2) The percentage of the subsidiary's common equity tier 1 capital 
that is not owned by the national bank or Federal savings association, 
multiplied by the difference between the common equity tier 1 capital of 
the subsidiary and the lower of:
    (i) The amount of common equity tier 1 capital the subsidiary must 
hold, or would be required to hold pursuant to paragraph (b) of this 
section, to avoid restrictions on distributions and discretionary bonus 
payments under Sec. 3.11 or equivalent standards established by the 
subsidiary's home country supervisor; or

[[Page 51]]

    (ii)(A) The standardized total risk-weighted assets of the national 
bank or Federal savings association that relate to the subsidiary 
multiplied by
    (B) The common equity tier 1 capital ratio the subsidiary must 
maintain to avoid restrictions on distributions and discretionary bonus 
payments under Sec. 3.11 or equivalent standards established by the 
subsidiary's home country supervisor.
    (d) Tier 1 minority interest includable in the tier 1 capital of the 
national bank or Federal savings association. For each consolidated 
subsidiary of the national bank or Federal savings association, the 
amount of tier 1 minority interest the national bank or Federal savings 
association may include in tier 1 capital is equal to:
    (1) The tier 1 minority interest of the subsidiary; minus
    (2) The percentage of the subsidiary's tier 1 capital that is not 
owned by the national bank or Federal savings association multiplied by 
the difference between the tier 1 capital of the subsidiary and the 
lower of:
    (i) The amount of tier 1 capital the subsidiary must hold, or would 
be required to hold pursuant to paragraph (b) of this section, to avoid 
restrictions on distributions and discretionary bonus payments under 
Sec. 3.11 or equivalent standards established by the subsidiary's home 
country supervisor, or
    (ii)(A) The standardized total risk-weighted assets of the national 
bank or Federal savings association that relate to the subsidiary 
multiplied by
    (B) The tier 1 capital ratio the subsidiary must maintain to avoid 
restrictions on distributions and discretionary bonus payments under 
Sec. 3.11 or equivalent standards established by the subsidiary's home 
country supervisor.
    (e) Total capital minority interest includable in the total capital 
of the national bank or Federal savings association. For each 
consolidated subsidiary of the national bank or Federal savings 
association, the amount of total capital minority interest the national 
bank or Federal savings association may include in total capital is 
equal to:
    (1) The total capital minority interest of the subsidiary; minus
    (2) The percentage of the subsidiary's total capital that is not 
owned by the national bank or Federal savings association multiplied by 
the difference between the total capital of the subsidiary and the lower 
of:
    (i) The amount of total capital the subsidiary must hold, or would 
be required to hold pursuant to paragraph (b) of this section, to avoid 
restrictions on distributions and discretionary bonus payments under 
Sec. 3.11 or equivalent standards established by the subsidiary's home 
country supervisor, or
    (ii)(A) The standardized total risk-weighted assets of the national 
bank or Federal savings association that relate to the subsidiary 
multiplied by
    (B) The total capital ratio the subsidiary must maintain to avoid 
restrictions on distributions and discretionary bonus payments under 
Sec. 3.11 or equivalent standards established by the subsidiary's home 
country supervisor.



Sec. 3.22  Regulatory capital adjustments and deductions.

    (a) Regulatory capital deductions from common equity tier 1 capital. 
A national bank or Federal savings association must deduct from the sum 
of its common equity tier 1 capital elements the items set forth in this 
paragraph (a):
    (1) Goodwill, net of associated deferred tax liabilities (DTLs) in 
accordance with paragraph (e) of this section, including goodwill that 
is embedded in the valuation of a significant investment in the capital 
of an unconsolidated financial institution in the form of common stock 
(and that is reflected in the consolidated financial statements of the 
national bank or Federal savings association), in accordance with 
paragraph (d) of this section;
    (2) Intangible assets, other than MSAs, net of associated DTLs in 
accordance with paragraph (e) of this section;
    (3) Deferred tax assets (DTAs) that arise from net operating loss 
and tax credit carryforwards net of any related valuation allowances and 
net of DTLs in accordance with paragraph (e) of this section;
    (4) Any gain-on-sale in connection with a securitization exposure;
    (5)(i) Any defined benefit pension fund net asset, net of any 
associated

[[Page 52]]

DTL in accordance with paragraph (e) of this section, held by a 
depository institution holding company. With the prior approval of the 
OCC, this deduction is not required for any defined benefit pension fund 
net asset to the extent the depository institution holding company has 
unrestricted and unfettered access to the assets in that fund.
    (ii) For an insured depository institution, no deduction is 
required.
    (iii) A national bank or Federal savings association must risk 
weight any portion of the defined benefit pension fund asset that is not 
deducted under paragraphs (a)(5)(i) or (a)(5)(ii) of this section as if 
the national bank or Federal savings association directly holds a 
proportional ownership share of each exposure in the defined benefit 
pension fund.
    (6) For an advanced approaches national bank or Federal savings 
association that has completed the parallel run process and that has 
received notification from the OCC pursuant to Sec. 3.121(d), the amount 
of expected credit loss that exceeds its eligible credit reserves; and
    (7) With respect to a financial subsidiary, the aggregate amount of 
the national bank's or Federal savings association's outstanding equity 
investment, including retained earnings, in its financial subsidiaries 
(as defined in [12 CFR 5.39 (OCC); 12 CFR 208.77 (Board))]. A national 
bank or Federal savings association must not consolidate the assets and 
liabilities of a financial subsidiary with those of the parent bank, and 
no other deduction is required under paragraph (c) of this section for 
investments in the capital instruments of financial subsidiaries.
    (8)(i) A Federal savings association must deduct the aggregate 
amount of its outstanding investments (both equity and debt) in, and 
extensions of credit to, subsidiaries that are not includable 
subsidiaries as defined in paragraph (a)(8)(iv) of this section and may 
not consolidate the assets and liabilities of the subsidiary with those 
of the Federal savings association. Any such deductions shall be 
deducted from assets and common equity tier 1 except as provided in 
paragraphs (a)(8)(ii) and (iii) of this section.
    (ii) If a Federal savings association has any investments (both debt 
and equity) in, or extensions or credit to, one or more subsidiaries 
engaged in any activity that would not fall within the scope of 
activities in which includable subsidiaries as defined in paragraph 
(a)(8)(iv) of this section may engage, it must deduct such investments 
and extensions of credit from assets and, thus, common equity tier 1 in 
accordance with paragraph (a)(8)(i) of this section.
    (iii) If a Federal savings association holds a subsidiary (either 
directly or through a subsidiary) that is itself a domestic depository 
institution, the OCC may, in its sole discretion upon determining that 
the amount of common equity tier 1 that would be required would be 
higher if the assets and liabilities of such subsidiary were 
consolidated with those of the parent Federal savings association than 
the amount that would be required if the parent Federal savings 
association's investment were deducted pursuant to paragraphs (a)(8)(i) 
and (ii) of this section, consolidate the assets and liabilities of that 
subsidiary with those of the parent Federal savings association in 
calculating the capital adequacy of the parent Federal savings 
association, regardless of whether the subsidiary would otherwise be an 
includable subsidiary as defined in paragraph (a)(8)(iv) of this 
section.
    (iv) For purposes of this section, the term includable subsidiary 
means a subsidiary of a Federal savings association that:
    (A) Is engaged solely in activities not impermissible for a national 
bank;
    (B) Is engaged in activities not permissible for a national bank, 
but only if acting solely as agent for its customers and such agency 
position is clearly documented in the Federal savings association's 
files;
    (C) Is engaged solely in mortgage-banking activities;
    (D)(1) Is itself an insured depository institution or a company the 
sole investment of which is an insured depository institution; and
    (2) Was acquired by the parent Federal savings association prior to 
May 1, 1989; or

[[Page 53]]

    (E) Was a subsidiary of any Federal savings association existing as 
a Federal savings association on August 9, 1989:
    (1) That was chartered prior to October 15, 1982, as a savings bank 
or a cooperative bank under state law; or
    (2) That acquired its principal assets from an association that was 
chartered prior to October 15, 1982, as a savings bank or a cooperative 
bank under state law.
    (b) Regulatory adjustments to common equity tier 1 capital. (1) A 
national bank or Federal savings association must adjust the sum of 
common equity tier 1 capital elements pursuant to the requirements set 
forth in this paragraph (b). Such adjustments to common equity tier 1 
capital must be made net of the associated deferred tax effects.
    (i) A national bank or Federal savings association that makes an 
AOCI opt-out election (as defined in paragraph (b)(2) of this section), 
must make the adjustments required under Sec. 3.22(b)(2)(i).
    (ii) A national bank or Federal savings association that is an 
advanced approaches national bank or Federal savings association, and a 
national bank or Federal savings association that has not made an AOCI 
opt-out election (as defined in paragraph (b)(2) of this section), must 
deduct any accumulated net gains and add any accumulated net losses on 
cash flow hedges included in AOCI that relate to the hedging of items 
that are not recognized at fair value on the balance sheet.
    (iii) A national bank or Federal savings association must deduct any 
net gain and add any net loss related to changes in the fair value of 
liabilities that are due to changes in the national bank's or Federal 
savings association's own credit risk. An advanced approaches national 
bank or Federal savings association also must deduct the credit spread 
premium over the risk free rate for derivatives that are liabilities.
    (2) AOCI opt-out election. (i) A national bank or Federal savings 
association that is not an advanced approaches national bank or Federal 
savings association may make a one-time election to opt out of the 
requirement to include all components of AOCI (with the exception of 
accumulated net gains and losses on cash flow hedges related to items 
that are not fair-valued on the balance sheet) in common equity tier 1 
capital (AOCI opt-out election). A national bank or Federal savings 
association that makes an AOCI opt-out election in accordance with this 
paragraph (b)(2) must adjust common equity tier 1 capital as follows:
    (A) Subtract any net unrealized gains and add any net unrealized 
losses on available-for-sale securities;
    (B) Subtract any net unrealized losses on available-for-sale 
preferred stock classified as an equity security under GAAP and 
available-for-sale equity exposures;
    (C) Subtract any accumulated net gains and add any accumulated net 
losses on cash flow hedges;
    (D) Subtract any amounts recorded in AOCI attributed to defined 
benefit postretirement plans resulting from the initial and subsequent 
application of the relevant GAAP standards that pertain to such plans 
(excluding, at the national bank's or Federal savings association's 
option, the portion relating to pension assets deducted under paragraph 
(a)(5) of this section); and
    (E) Subtract any net unrealized gains and add any net unrealized 
losses on held-to-maturity securities that are included in AOCI.
    (ii) A national bank or Federal savings association that is not an 
advanced approaches national bank or Federal savings association must 
make its AOCI opt-out election in its Call Report filed for the first 
regulatory reporting period after the date required for such national 
bank or Federal savings association to comply with subpart A of this 
part as set forth in Sec. 3.1(f).
    (iii) With respect to a national bank or Federal savings association 
that is not an advanced approaches national bank or Federal savings 
association, each of its subsidiary banking organizations that is 
subject to regulatory capital requirements issued by the Board of 
Governors of the Federal Reserve, the Federal Deposit Insurance

[[Page 54]]

Corporation, or the Office of the Comptroller of the Currency \17\ must 
elect the same option as the national bank or Federal savings 
association pursuant to this paragraph (b)(2).
---------------------------------------------------------------------------

    \17\ These rules include the regulatory capital requirements set 
forth at 12 CFR part 3 (OCC); 12 CFR part 225 (Board); 12 CFR part 325, 
and 12 CFR part 390 (FDIC).
---------------------------------------------------------------------------

    (iv) With prior notice to the OCC, a national bank or Federal 
savings association resulting from a merger, acquisition, or purchase 
transaction and that is not an advanced approaches national bank or 
Federal savings association may change its AOCI opt-out election in its 
Call Report filed for the first reporting period after the date required 
for such national bank or Federal savings association to comply with 
subpart A of this part as set forth in Sec. 3.1(f) if:
    (A) Other than as set forth in paragraph (b)(2)(iv)(C) of this 
section, the merger, acquisition, or purchase transaction involved the 
acquisition or purchase of all or substantially all of either the assets 
or voting stock of another banking organization that is subject to 
regulatory capital requirements issued by the Board of Governors of the 
Federal Reserve, the Federal Deposit Insurance Corporation, or the 
Office of the Comptroller of the Currency; \18\
---------------------------------------------------------------------------

    \18\ These rules include the regulatory capital requirements set 
forth at 12 CFR part 3 (OCC); 12 CFR part 225 (Board); 12 CFR part 325, 
and 12 CFR part 390 (FDIC).
---------------------------------------------------------------------------

    (B) Prior to the merger, acquisition, or purchase transaction, only 
one of the banking organizations involved in the transaction made an 
AOCI opt-out election under this section; and
    (C) A national bank or Federal savings association may, with the 
prior approval of the OCC, change its AOCI opt-out election under this 
paragraph (b) in the case of a merger, acquisition, or purchase 
transaction that meets the requirements set forth at paragraph 
(b)(2)(iv)(B) of this section, but does not meet the requirements of 
paragraph (b)(2)(iv)(A). In making such a determination, the OCC may 
consider the terms of the merger, acquisition, or purchase transaction, 
as well as the extent of any changes to the risk profile, complexity, 
and scope of operations of the national bank or Federal savings 
association resulting from the merger, acquisition, or purchase 
transaction.
    (c) Deductions from regulatory capital related to investments in 
capital instruments \19\--(1) Investment in the national bank's or 
Federal savings association's own capital instruments. A national bank 
or Federal savings association must deduct an investment in the national 
bank's or Federal savings association's own capital instruments as 
follows:
---------------------------------------------------------------------------

    \19\ The national bank or Federal savings association must calculate 
amounts deducted under paragraphs (c) through (f) of this section after 
it calculates the amount of ALLL includable in tier 2 capital under 
Sec. 3.20(d)(3).
---------------------------------------------------------------------------

    (i) A national bank or Federal savings association must deduct an 
investment in the national bank's or Federal savings association's own 
common stock instruments from its common equity tier 1 capital elements 
to the extent such instruments are not excluded from regulatory capital 
under Sec. 3.20(b)(1);
    (ii) A national bank or Federal savings association must deduct an 
investment in the national bank's or Federal savings association's own 
additional tier 1 capital instruments from its additional tier 1 capital 
elements; and
    (iii) A national bank or Federal savings association must deduct an 
investment in the national bank's or Federal savings association's own 
tier 2 capital instruments from its tier 2 capital elements.
    (2) Corresponding deduction approach. For purposes of subpart C of 
this part, the corresponding deduction approach is the methodology used 
for the deductions from regulatory capital related to reciprocal cross 
holdings (as described in paragraph (c)(3) of this section), non-
significant investments in the capital of unconsolidated financial 
institutions (as described in paragraph (c)(4) of this section), and 
non-common stock significant investments in the capital of 
unconsolidated financial institutions (as described in paragraph (c)(5) 
of this section). Under the corresponding deduction approach, a national 
bank or Federal savings association must make deductions from the 
component of capital for which the underlying instrument would qualify 
if it were issued by the national bank or

[[Page 55]]

Federal savings association itself, as described in paragraphs 
(c)(2)(i)-(iii) of this section. If the national bank or Federal savings 
association does not have a sufficient amount of a specific component of 
capital to effect the required deduction, the shortfall must be deducted 
according to paragraph (f) of this section.
    (i) If an investment is in the form of an instrument issued by a 
financial institution that is not a regulated financial institution, the 
national bank or Federal savings association must treat the instrument 
as:
    (A) A common equity tier 1 capital instrument if it is common stock 
or represents the most subordinated claim in liquidation of the 
financial institution; and
    (B) An additional tier 1 capital instrument if it is subordinated to 
all creditors of the financial institution and is senior in liquidation 
only to common shareholders.
    (ii) If an investment is in the form of an instrument issued by a 
regulated financial institution and the instrument does not meet the 
criteria for common equity tier 1, additional tier 1 or tier 2 capital 
instruments under Sec. 3.20, the national bank or Federal savings 
association must treat the instrument as:
    (A) A common equity tier 1 capital instrument if it is common stock 
included in GAAP equity or represents the most subordinated claim in 
liquidation of the financial institution;
    (B) An additional tier 1 capital instrument if it is included in 
GAAP equity, subordinated to all creditors of the financial institution, 
and senior in a receivership, insolvency, liquidation, or similar 
proceeding only to common shareholders; and
    (C) A tier 2 capital instrument if it is not included in GAAP equity 
but considered regulatory capital by the primary supervisor of the 
financial institution.
    (iii) If an investment is in the form of a non-qualifying capital 
instrument (as defined in Sec. 3.300(c)), the national bank or Federal 
savings association must treat the instrument as:
    (A) An additional tier 1 capital instrument if such instrument was 
included in the issuer's tier 1 capital prior to May 19, 2010; or
    (B) A tier 2 capital instrument if such instrument was included in 
the issuer's tier 2 capital (but not includable in tier 1 capital) prior 
to May 19, 2010.
    (3) Reciprocal cross holdings in the capital of financial 
institutions. A national bank or Federal savings association must deduct 
investments in the capital of other financial institutions it holds 
reciprocally, where such reciprocal cross holdings result from a formal 
or informal arrangement to swap, exchange, or otherwise intend to hold 
each other's capital instruments, by applying the corresponding 
deduction approach.
    (4) Non-significant investments in the capital of unconsolidated 
financial institutions. (i) A national bank or Federal savings 
association must deduct its non-significant investments in the capital 
of unconsolidated financial institutions (as defined in Sec. 3.2) that, 
in the aggregate, exceed 10 percent of the sum of the national bank's or 
Federal savings association's common equity tier 1 capital elements 
minus all deductions from and adjustments to common equity tier 1 
capital elements required under paragraphs (a) through (c)(3) of this 
section (the 10 percent threshold for non-significant investments) by 
applying the corresponding deduction approach.\20\ The deductions 
described in this section are net of associated DTLs in accordance with 
paragraph (e) of this section. In addition, a national bank or Federal 
savings association that underwrites a failed underwriting, with the 
prior written approval of the OCC, for the period of time stipulated by 
the OCC, is not required to deduct a non-significant investment in the 
capital of an unconsolidated financial institution pursuant to this 
paragraph

[[Page 56]]

(c) to the extent the investment is related to the failed 
underwriting.\21\
---------------------------------------------------------------------------

    \20\ With the prior written approval of the OCC, for the period of 
time stipulated by the OCC, a national bank or Federal savings 
association is not required to deduct a non-significant investment in 
the capital instrument of an unconsolidated financial institution 
pursuant to this paragraph if the financial institution is in distress 
and if such investment is made for the purpose of providing financial 
support to the financial institution, as determined by the OCC.
    \21\ Any non-significant investments in the capital of 
unconsolidated financial institutions that do not exceed the 10 percent 
threshold for non-significant investments under this section must be 
assigned the appropriate risk weight under subparts D, E, or F of this 
part, as applicable.
---------------------------------------------------------------------------

    (ii) The amount to be deducted under this section from a specific 
capital component is equal to:
    (A) The national bank's or Federal savings association's non-
significant investments in the capital of unconsolidated financial 
institutions exceeding the 10 percent threshold for non-significant 
investments, multiplied by
    (B) The ratio of the national bank's or Federal savings 
association's non-significant investments in the capital of 
unconsolidated financial institutions in the form of such capital 
component to the national bank's or Federal savings association's total 
non-significant investments in unconsolidated financial institutions.
    (5) Significant investments in the capital of unconsolidated 
financial institutions that are not in the form of common stock. A 
national bank or Federal savings association must deduct its significant 
investments in the capital of unconsolidated financial institutions that 
are not in the form of common stock by applying the corresponding 
deduction approach.\22\ The deductions described in this section are net 
of associated DTLs in accordance with paragraph (e) of this section. In 
addition, with the prior written approval of the OCC, for the period of 
time stipulated by the OCC, a national bank or Federal savings 
association that underwrites a failed underwriting is not required to 
deduct a significant investment in the capital of an unconsolidated 
financial institution pursuant to this paragraph (c) if such investment 
is related to such failed underwriting.
---------------------------------------------------------------------------

    \22\ With prior written approval of the OCC, for the period of time 
stipulated by the OCC, a national bank or Federal savings association is 
not required to deduct a significant investment in the capital 
instrument of an unconsolidated financial institution in distress which 
is not in the form of common stock pursuant to this section if such 
investment is made for the purpose of providing financial support to the 
financial institution as determined by the OCC.
---------------------------------------------------------------------------

    (d) Items subject to the 10 and 15 percent common equity tier 1 
capital deduction thresholds. (1) A national bank or Federal savings 
association must deduct from common equity tier 1 capital elements the 
amount of each of the items set forth in this paragraph (d) that, 
individually, exceeds 10 percent of the sum of the national bank's or 
Federal savings association's common equity tier 1 capital elements, 
less adjustments to and deductions from common equity tier 1 capital 
required under paragraphs (a) through (c) of this section (the 10 
percent common equity tier 1 capital deduction threshold).
    (i) DTAs arising from temporary differences that the national bank 
or Federal savings association could not realize through net operating 
loss carrybacks, net of any related valuation allowances and net of 
DTLs, in accordance with paragraph (e) of this section. A national bank 
or Federal savings association is not required to deduct from the sum of 
its common equity tier 1 capital elements DTAs (net of any related 
valuation allowances and net of DTLs, in accordance with Sec. 3.22(e)) 
arising from timing differences that the national bank or Federal 
savings association could realize through net operating loss carrybacks. 
The national bank or Federal savings association must risk weight these 
assets at 100 percent. For a national bank or Federal savings 
association that is a member of a consolidated group for tax purposes, 
the amount of DTAs that could be realized through net operating loss 
carrybacks may not exceed the amount that the national bank or Federal 
savings association could reasonably expect to have refunded by its 
parent holding company.
    (ii) MSAs net of associated DTLs, in accordance with paragraph (e) 
of this section.
    (iii) Significant investments in the capital of unconsolidated 
financial institutions in the form of common stock, net of associated 
DTLs in accordance with paragraph (e) of this section.\23\ Significant 
investments in the

[[Page 57]]

capital of unconsolidated financial institutions in the form of common 
stock subject to the 10 percent common equity tier 1 capital deduction 
threshold may be reduced by any goodwill embedded in the valuation of 
such investments deducted by the national bank or Federal savings 
association pursuant to paragraph (a)(1) of this section. In addition, 
with the prior written approval of the OCC, for the period of time 
stipulated by the OCC, a national bank or Federal savings association 
that underwrites a failed underwriting is not required to deduct a 
significant investment in the capital of an unconsolidated financial 
institution in the form of common stock pursuant to this paragraph (d) 
if such investment is related to such failed underwriting.
---------------------------------------------------------------------------

    \23\ With the prior written approval of the OCC, for the period of 
time stipulated by the OCC, a national bank or Federal savings 
association is not required to deduct a significant investment in the 
capital instrument of an unconsolidated financial institution in 
distress in the form of common stock pursuant to this section if such 
investment is made for the purpose of providing financial support to the 
financial institution as determined by the OCC.
---------------------------------------------------------------------------

    (2) A national bank or Federal savings association must deduct from 
common equity tier 1 capital elements the items listed in paragraph 
(d)(1) of this section that are not deducted as a result of the 
application of the 10 percent common equity tier 1 capital deduction 
threshold, and that, in aggregate, exceed 17.65 percent of the sum of 
the national bank's or Federal savings association's common equity tier 
1 capital elements, minus adjustments to and deductions from common 
equity tier 1 capital required under paragraphs (a) through (c) of this 
section, minus the items listed in paragraph (d)(1) of this section (the 
15 percent common equity tier 1 capital deduction threshold). Any 
goodwill that has been deducted under paragraph (a)(1) of this section 
can be excluded from the significant investments in the capital of 
unconsolidated financial institutions in the form of common stock.\24\
---------------------------------------------------------------------------

    \24\ The amount of the items in paragraph (d) of this section that 
is not deducted from common equity tier 1 capital pursuant to this 
section must be included in the risk-weighted assets of the national 
bank or Federal savings association and assigned a 250 percent risk 
weight.
---------------------------------------------------------------------------

    (3) For purposes of calculating the amount of DTAs subject to the 10 
and 15 percent common equity tier 1 capital deduction thresholds, a 
national bank or Federal savings association may exclude DTAs and DTLs 
relating to adjustments made to common equity tier 1 capital under 
paragraph (b) of this section. A national bank or Federal savings 
association that elects to exclude DTAs relating to adjustments under 
paragraph (b) of this section also must exclude DTLs and must do so 
consistently in all future calculations. A national bank or Federal 
savings association may change its exclusion preference only after 
obtaining the prior approval of the OCC.
    (e) Netting of DTLs against assets subject to deduction. (1) Except 
as described in paragraph (e)(3) of this section, netting of DTLs 
against assets that are subject to deduction under this section is 
permitted, but not required, if the following conditions are met:
    (i) The DTL is associated with the asset; and
    (ii) The DTL would be extinguished if the associated asset becomes 
impaired or is derecognized under GAAP.
    (2) A DTL may only be netted against a single asset.
    (3) For purposes of calculating the amount of DTAs subject to the 
threshold deduction in paragraph (d) of this section, the amount of DTAs 
that arise from net operating loss and tax credit carryforwards, net of 
any related valuation allowances, and of DTAs arising from temporary 
differences that the national bank or Federal savings association could 
not realize through net operating loss carrybacks, net of any related 
valuation allowances, may be offset by DTLs (that have not been netted 
against assets subject to deduction pursuant to paragraph (e)(1) of this 
section) subject to the conditions set forth in this paragraph (e).
    (i) Only the DTAs and DTLs that relate to taxes levied by the same 
taxation authority and that are eligible for offsetting by that 
authority may be offset for purposes of this deduction.
    (ii) The amount of DTLs that the national bank or Federal savings 
association nets against DTAs that arise from net operating loss and tax 
credit

[[Page 58]]

carryforwards, net of any related valuation allowances, and against DTAs 
arising from temporary differences that the national bank or Federal 
savings association could not realize through net operating loss 
carrybacks, net of any related valuation allowances, must be allocated 
in proportion to the amount of DTAs that arise from net operating loss 
and tax credit carryforwards (net of any related valuation allowances, 
but before any offsetting of DTLs) and of DTAs arising from temporary 
differences that the national bank or Federal savings association could 
not realize through net operating loss carrybacks (net of any related 
valuation allowances, but before any offsetting of DTLs), respectively.
    (4) A national bank or Federal savings association may offset DTLs 
embedded in the carrying value of a leveraged lease portfolio acquired 
in a business combination that are not recognized under GAAP against 
DTAs that are subject to paragraph (d) of this section in accordance 
with this paragraph (e).
    (5) A national bank or Federal savings association must net DTLs 
against assets subject to deduction under this section in a consistent 
manner from reporting period to reporting period. A national bank or 
Federal savings association may change its preference regarding the 
manner in which it nets DTLs against specific assets subject to 
deduction under this section only after obtaining the prior approval of 
the OCC.
    (f) Insufficient amounts of a specific regulatory capital component 
to effect deductions. Under the corresponding deduction approach, if a 
national bank or Federal savings association does not have a sufficient 
amount of a specific component of capital to effect the required 
deduction after completing the deductions required under paragraph (d) 
of this section, the national bank or Federal savings association must 
deduct the shortfall from the next higher (that is, more subordinated) 
component of regulatory capital.
    (g) Treatment of assets that are deducted. A national bank or 
Federal savings association must exclude from standardized total risk-
weighted assets and, as applicable, advanced approaches total risk-
weighted assets any item deducted from regulatory capital under 
paragraphs (a), (c), and (d) of this section.
    (h) Net long position. (1) For purposes of calculating an investment 
in the national bank's or Federal savings association's own capital 
instrument and an investment in the capital of an unconsolidated 
financial institution under this section, the net long position is the 
gross long position in the underlying instrument determined in 
accordance with paragraph (h)(2) of this section, as adjusted to 
recognize a short position in the same instrument calculated in 
accordance with paragraph (h)(3) of this section.
    (2) Gross long position. The gross long position is determined as 
follows:
    (i) For an equity exposure that is held directly, the adjusted 
carrying value as that term is defined in Sec. 3.51(b);
    (ii) For an exposure that is held directly and is not an equity 
exposure or a securitization exposure, the exposure amount as that term 
is defined in Sec. 3.2;
    (iii) For an indirect exposure, the national bank's or Federal 
savings association's carrying value of the investment in the investment 
fund, provided that, alternatively:
    (A) A national bank or Federal savings association may, with the 
prior approval of the OCC, use a conservative estimate of the amount of 
its investment in its own capital instruments or the capital of an 
unconsolidated financial institution held through a position in an 
index; or
    (B) A national bank or Federal savings association may calculate the 
gross long position for the national bank's or Federal savings 
association's own capital instruments or the capital of an 
unconsolidated financial institution by multiplying the national bank's 
or Federal savings association's carrying value of its investment in the 
investment fund by either:
    (1) The highest stated investment limit (in percent) for investments 
in the national bank's or Federal savings association's own capital 
instruments or the capital of unconsolidated financial institutions as 
stated in the prospectus, partnership agreement, or

[[Page 59]]

similar contract defining permissible investments of the investment 
fund; or
    (2) The investment fund's actual holdings of own capital instruments 
or the capital of unconsolidated financial institutions.
    (iv) For a synthetic exposure, the amount of the national bank's or 
Federal savings association's loss on the exposure if the reference 
capital instrument were to have a value of zero.
    (3) Adjustments to reflect a short position. In order to adjust the 
gross long position to recognize a short position in the same 
instrument, the following criteria must be met:
    (i) The maturity of the short position must match the maturity of 
the long position, or the short position has a residual maturity of at 
least one year (maturity requirement); or
    (ii) For a position that is a trading asset or trading liability 
(whether on- or off-balance sheet) as reported on the national bank's or 
Federal savings association's Call Report, if the national bank or 
Federal savings association has a contractual right or obligation to 
sell the long position at a specific point in time and the counterparty 
to the contract has an obligation to purchase the long position if the 
national bank or Federal savings association exercises its right to 
sell, this point in time may be treated as the maturity of the long 
position such that the maturity of the long position and short position 
are deemed to match for purposes of the maturity requirement, even if 
the maturity of the short position is less than one year; and
    (iii) For an investment in the national bank's or Federal savings 
association's own capital instrument under paragraph (c)(1) of this 
section or an investment in a capital of an unconsolidated financial 
institution under paragraphs (c)(4), (c)(5), and (d)(1)(iii) of this 
section.
    (A) A national bank or Federal savings association may only net a 
short position against a long position in the national bank's or Federal 
savings association's own capital instrument under paragraph (c)(1) of 
this section if the short position involves no counterparty credit risk.
    (B) A gross long position in a national bank's or Federal savings 
association's own capital instrument or in a capital instrument of an 
unconsolidated financial institution resulting from a position in an 
index may be netted against a short position in the same index. Long and 
short positions in the same index without maturity dates are considered 
to have matching maturities.
    (C) A short position in an index that is hedging a long cash or 
synthetic position in a national bank's or Federal savings association's 
own capital instrument or in a capital instrument of an unconsolidated 
financial institution can be decomposed to provide recognition of the 
hedge. More specifically, the portion of the index that is composed of 
the same underlying instrument that is being hedged may be used to 
offset the long position if both the long position being hedged and the 
short position in the index are reported as a trading asset or trading 
liability (whether on- or off-balance sheet) on the national bank's or 
Federal savings association's Call Report, and the hedge is deemed 
effective by the national bank's or Federal savings association's 
internal control processes, which have not been found to be inadequate 
by the OCC.

[78 FR 62157, 62273, 62274, Oct. 11, 2013]



Secs. 3.23-3.29  [Reserved]



          Subpart D_Risk-Weighted Assets_Standardized Approach

    Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted.



Sec. 3.30  Applicability.

    (a) This subpart sets forth methodologies for determining risk-
weighted assets for purposes of the generally applicable risk-based 
capital requirements for all national banks or Federal savings 
associations.
    (b) Notwithstanding paragraph (a) of this section, a market risk 
national bank or Federal savings association 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

[[Page 60]]

positions that are not trading positions, OTC derivative positions, 
cleared transactions, and unsettled transactions).

              Risk-Weighted Assets For General Credit Risk



Sec. 3.31  Mechanics for calculating risk-weighted assets for general
credit risk.

    (a) General risk-weighting requirements. A national bank or Federal 
savings association must apply risk weights to its exposures as follows:
    (1) A national bank or Federal savings association 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. 3.38;
    (ii) A cleared transaction subject to Sec. 3.35;
    (iii) A default fund contribution subject to Sec. 3.35;
    (iv) A securitization exposure subject to Secs. 3.41 through 3.45; 
or
    (v) An equity exposure (other than an equity OTC derivative 
contract) subject to Secs. 3.51 through 3.53.
    (2) The national bank or Federal savings association 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. 3.32  General risk weights.

    (a) Sovereign exposures--(1) Exposures to the U.S. government. (i) 
Notwithstanding any other requirement in this subpart, a national bank 
or Federal savings association 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. This includes a deposit or other exposure, or the 
portion of a deposit or other exposure, that is insured or otherwise 
unconditionally guaranteed by the FDIC or National Credit Union 
Administration.
    (ii) A national bank or Federal savings association 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. This includes an exposure, or the portion of an 
exposure, that is conditionally guaranteed by the FDIC or National 
Credit Union Administration.
    (2) Other sovereign exposures. In accordance with Table 1 to 
Sec. 3.32, a national bank or Federal savings association must assign a 
risk weight to a sovereign exposure based on the CRC applicable to the 
sovereign or the sovereign's OECD membership status if there is no CRC 
applicable to the sovereign.

       Table 1 toSec. 3.32--Risk Weights for Sovereign Exposures
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
CRC:
  0-1...................................................               0
  2.....................................................              20
  3.....................................................              50
  4-6...................................................             100
  7.....................................................             150
OECD Member with No CRC.................................               0
Non-OECD Member with No CRC.............................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------

    (3) Certain sovereign exposures. Notwithstanding paragraph (a)(2) of 
this section, a national bank or Federal savings association may assign 
to a sovereign exposure a risk weight that is lower than the applicable 
risk weight in Table 1 to Sec. 3.32 if:
    (i) The exposure is denominated in the sovereign's currency;
    (ii) The national bank or Federal savings association 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 
home country supervisor allows national banks or Federal savings 
associations

[[Page 61]]

under its jurisdiction to assign to the same exposures to the sovereign.
    (4) Exposures to a non-OECD member sovereign with no CRC. Except as 
provided in paragraphs (a)(3), (a)(5) and (a)(6) of this section, a 
national bank or Federal savings association must assign a 100 percent 
risk weight to an exposure to a sovereign if the sovereign does not have 
a CRC.
    (5) Exposures to an OECD member sovereign with no CRC. Except as 
provided in paragraph (a)(6) of this section, a national bank or Federal 
savings association must assign a 0 percent risk weight to an exposure 
to a sovereign that is a member of the OECD if the sovereign does not 
have a CRC.
    (6) Sovereign default. A national bank or Federal savings 
association must assign a 150 percent risk weight to a 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 national bank or Federal savings association 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 GSEs. (1) A national bank or Federal savings 
association must assign a 20 percent risk weight to an exposure to a GSE 
other than an equity exposure or preferred stock.
    (2) A national bank or Federal savings association 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 national bank or Federal savings association 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)(iv) and (d)(3) of this section, a national bank 
or Federal savings association must assign a risk weight to an exposure 
to a foreign bank, in accordance with Table 2 to Sec. 3.32, based on the 
CRC that corresponds to the foreign bank's home country or the OECD 
membership status of the foreign bank's home country if there is no CRC 
applicable to the foreign bank's home country.

   Table 2 toSec. 3.32--Risk Weights for Exposures to Foreign Banks
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
CRC:
  0-1...................................................              20
  2.....................................................              50
  3.....................................................             100
  4-7...................................................             150
OECD Member with No CRC.................................              20
Non-OECD Member with No CRC.............................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------

    (ii) A national bank or Federal savings association must assign a 20 
percent risk weight to an exposure to a foreign bank whose home country 
is a member of the OECD and does not have a CRC.
    (iii) A national bank or Federal savings association must assign a 
100 percent risk weight to an exposure to a foreign bank whose home 
country is not a member of the OECD and 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.
    (iv) A national bank or Federal savings association 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 national bank or Federal savings association must assign a 100 
percent risk weight to an exposure to a financial institution if the 
exposure may be included 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

[[Page 62]]

institution in the form of common stock pursuant to Sec. 3.22(d)(iii);
    (iii) Deducted from regulatory capital under Sec. 3.22; or
    (iv) Subject to a 150 percent risk weight under paragraph (d)(2)(iv) 
or Table 2 of paragraph (d)(2) of this section.
    (e) Exposures to public sector entities (PSEs)--(1) Exposures to 
U.S. PSEs. (i) A national bank or Federal savings association 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 national bank or Federal savings association 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 national bank or Federal savings 
association must assign a risk weight to a general obligation exposure 
to a PSE, in accordance with Table 3 to Sec. 3.32, based on the CRC that 
corresponds to the PSE's home country or the OECD membership status of 
the PSE's home country if there is no CRC applicable to the PSE's home 
country.
    (ii) Except as provided in paragraphs (e)(1) and (e)(3) of this 
section, a national bank or Federal savings association must assign a 
risk weight to a revenue obligation exposure to a PSE, in accordance 
with Table 4 to Sec. 3.32, based on the CRC that corresponds to the 
PSE's home country; or the OECD membership status of the PSE's home 
country if there is no CRC applicable to the PSE's home country.
    (3) A national bank or Federal savings association may assign a 
lower risk weight than would otherwise apply under Tables 3 or 4 to 
Sec. 3.32 to an exposure to a foreign PSE if:
    (i) The PSE's home country supervisor 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 to 
Sec. 3.32.

Table 3 toSec. 3.32--Risk Weights for Non-U.S. PSE General Obligations
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
CRC:
  0-1...................................................              20
  2.....................................................              50
  3.....................................................             100
  4-7...................................................             150
OECD Member with No CRC.................................              20
Non-OECD Member with No CRC.............................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------


Table 4 toSec. 3.32--Risk Weights for Non-U.S. PSE Revenue Obligations
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
CRC:
  0-1...................................................              50
  2-3...................................................             100
  4-7...................................................             150
OECD Member with No CRC.................................              50
Non-OECD Member with No CRC.............................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------

    (4) Exposures to PSEs from an OECD member sovereign with no CRC. (i) 
A national bank or Federal savings association must assign a 20 percent 
risk weight to a general obligation exposure to a PSE whose home country 
is an OECD member sovereign with no CRC.
    (ii) A national bank or Federal savings association must assign a 50 
percent risk weight to a revenue obligation exposure to a PSE whose home 
country is an OECD member sovereign with no CRC.
    (5) Exposures to PSEs whose home country is not an OECD member 
sovereign with no CRC. A national bank or Federal savings association 
must assign a 100 percent risk weight to an exposure to a PSE whose home 
country is not a member of the OECD and does not have a CRC.
    (6) A national bank or Federal savings association 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 national bank or Federal savings 
association must assign a 100 percent risk weight to all its corporate 
exposures.

[[Page 63]]

    (g) Residential mortgage exposures. (1) A national bank or Federal 
savings association must assign a 50 percent risk weight to a first-lien 
residential mortgage exposure that:
    (i) Is secured by a property that is either owner-occupied or 
rented;
    (ii) Is made in accordance with prudent underwriting standards, 
including standards relating to the loan amount as a percent of the 
appraised value of the property;
    (iii) Is not 90 days or more past due or carried in nonaccrual 
status; and
    (iv) Is not restructured or modified.
    (2) A national bank or Federal savings association must assign a 100 
percent risk weight to a first-lien residential mortgage exposure that 
does not meet the criteria in paragraph (g)(1) of this section, and to 
junior-lien residential mortgage exposures.
    (3) For the purpose of this paragraph (g), if a national bank or 
Federal savings association holds the first-lien and junior-lien(s) 
residential mortgage exposures, and no other party holds an intervening 
lien, the national bank or Federal savings association must combine the 
exposures and treat them as a single first-lien residential mortgage 
exposure.
    (4) A loan modified or restructured 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 construction loans. A national bank or Federal savings 
association must assign a 50 percent risk weight to a pre-sold 
construction loan unless the purchase contract is cancelled, in which 
case a national bank or Federal savings association must assign a 100 
percent risk weight.
    (i) Statutory multifamily mortgages. A national bank or Federal 
savings association must assign a 50 percent risk weight to a statutory 
multifamily mortgage.
    (j) High-volatility commercial real estate (HVCRE) exposures. A 
national bank or Federal savings association 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, a national bank or Federal savings 
association must determine a risk weight for an exposure that is 90 days 
or more past due or on nonaccrual according to the requirements set 
forth in this paragraph (k).
    (1) A national bank or Federal savings association must assign a 150 
percent risk weight to the portion of the exposure that is not 
guaranteed or that is unsecured.
    (2) A national bank or Federal savings association may assign a risk 
weight to the guaranteed portion of a past due exposure based on the 
risk weight that applies under Sec. 3.36 if the guarantee or credit 
derivative meets the requirements of that section.
    (3) A national bank or Federal savings association may assign a risk 
weight to the collateralized portion of a past due exposure based on the 
risk weight that applies under Sec. 3.37 if the collateral meets the 
requirements of that section.
    (l) Other assets. (1) A national bank or Federal savings association 
must assign a zero percent risk weight to cash owned and held in all 
offices of the national bank or Federal savings association or in 
transit; to gold bullion held in the national bank's or Federal savings 
association'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.
    (2) A national bank or Federal savings association must assign a 20 
percent risk weight to cash items in the process of collection.
    (3) A national bank or Federal savings association must assign a 100 
percent risk weight to DTAs arising from temporary differences that the 
national bank or Federal savings association could realize through net 
operating loss carrybacks.
    (4) A national bank or Federal savings association must assign a 250 
percent risk weight to the portion of each

[[Page 64]]

of the following items that is not deducted from common equity tier 1 
capital pursuant to Sec. 3.22(d):
    (i) MSAs; and
    (ii) DTAs arising from temporary differences that the national bank 
or Federal savings association could not realize through net operating 
loss carrybacks.
    (5) A national bank or Federal savings association must assign a 100 
percent risk weight to all assets not specifically assigned a different 
risk weight under this subpart and that are not deducted from tier 1 or 
tier 2 capital pursuant to Sec. 3.22.
    (6) Notwithstanding the requirements of this section, a national 
bank or Federal savings association 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 national bank or Federal savings association 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. 3.33  Off-balance sheet exposures.

    (a) General. (1) A national bank or Federal savings association 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 national bank or Federal savings association commits to 
provide a commitment, the national bank or Federal savings association 
may apply the lower of the two applicable CCFs.
    (3) Where a national bank or Federal savings association provides a 
commitment structured as a syndication or participation, the national 
bank or Federal savings association is only required to calculate the 
exposure amount for its pro rata share of the commitment.
    (4) Where a national bank or Federal savings association provides a 
commitment, enters into a repurchase agreement, or provides a credit-
enhancing representation and warranty, and such commitment, repurchase 
agreement, or credit-enhancing representation and warranty is not a 
securitization exposure, the exposure amount shall be no greater than 
the maximum contractual amount of the commitment, repurchase agreement, 
or credit-enhancing representation and warranty, as applicable.
    (b) Credit conversion factors--(1) Zero percent CCF. A national bank 
or Federal savings association must apply a zero percent CCF to the 
unused portion of a commitment that is unconditionally cancelable by the 
national bank or Federal savings association.
    (2) 20 percent CCF. A national bank or Federal savings association 
must apply a 20 percent CCF to the amount of:
    (i) Commitments with an original maturity of one year or less that 
are not unconditionally cancelable by the national bank or Federal 
savings association; and
    (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 national bank or Federal savings association 
must apply a 50 percent CCF to the amount of:
    (i) Commitments with an original maturity of more than one year that 
are not unconditionally cancelable by the national bank or Federal 
savings association; and
    (ii) Transaction-related contingent items, including performance 
bonds, bid bonds, warranties, and performance standby letters of credit.
    (4) 100 percent CCF. A national bank or Federal savings association 
must apply a 100 percent CCF to the amount of 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 fair values of all positions the national 
bank or Federal savings association has sold subject to repurchase);

[[Page 65]]

    (iii) Credit-enhancing representations and warranties that are not 
securitization exposures;
    (iv) Off-balance sheet securities lending transactions (the off-
balance sheet component of which equals the sum of the current fair 
values of all positions the national bank or Federal savings association 
has lent under the transaction);
    (v) Off-balance sheet securities borrowing transactions (the off-
balance sheet component of which equals the sum of the current fair 
values of all non-cash positions the national bank or Federal savings 
association has posted as collateral under the transaction);
    (vi) Financial standby letters of credit; and
    (vii) Forward agreements.



Sec. 3.34  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 national bank's or 
Federal savings association'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-fair 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-fair value, 
is calculated by multiplying the notional principal amount of the OTC 
derivative contract by the appropriate conversion factor in Table 1 to 
Sec. 3.34.
    (B) For purposes of calculating either the PFE under this paragraph 
(a) 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 1 to Sec. 3.34, the PFE must be 
calculated using the appropriate ``other'' conversion factor.
    (D) A national bank or Federal savings association 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 1 toSec. 3.34--Conversion Factor Matrix for Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                            Credit    Credit (non-
                                                                              Foreign    (investment  investment-                 Precious
                    Remaining maturity \2\                       Interest     exchange      grade        grade        Equity       metals       Other
                                                                   rate       rate and    reference    reference                  (except
                                                                                gold      asset) \3\     asset)                    gold)
--------------------------------------------------------------------------------------------------------------------------------------------------------
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 equal to five years...        0.005         0.05         0.05         0.10         0.08         0.07         0.12
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 fair 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 national bank or Federal savings association 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 national bank or
  Federal savings association must use the column labeled ``Credit (non-investment-grade reference asset)'' for all other credit derivatives.


[[Page 66]]

    (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-fair 
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 = (0.4 x Agross) + (0.6 x NGR x 
Agross),


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 ratio of the net current credit 
exposure to the gross current credit exposure. In calculating the NGR, 
the gross current credit exposure equals the sum of the positive current 
credit exposures (as determined under paragraph (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 national bank or Federal savings association 
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. 3.37(b).
    (2) As an alternative to the simple approach, a national bank or 
Federal savings association 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-fair value on a daily basis 
and subject to a daily margin maintenance requirement by applying a risk 
weight to the exposure as if it were uncollateralized and adjusting the 
exposure amount calculated under paragraph (a)(1) or (2) of this section 
using the collateral haircut approach in Sec. 3.37(c). The national bank 
or Federal savings association must substitute the exposure amount 
calculated under paragraph (a)(1) or (2) of this section for [Sigma]E in 
the equation in Sec. 3.37(c)(2).
    (c) Counterparty credit risk for OTC credit derivatives. (1) 
Protection purchasers. A national bank or Federal savings association 
that purchases an OTC credit derivative that is recognized under 
Sec. 3.36 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. 3.32 provided 
that the national bank or Federal savings association does so 
consistently for all such credit derivatives. The national bank or 
Federal savings association 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 national bank or Federal savings 
association 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 national bank or Federal savings 
association is not required to compute a counterparty credit risk 
capital requirement for the OTC credit derivative under Sec. 3.32, 
provided that this treatment is applied consistently for all such OTC 
credit derivatives. The national bank or Federal savings association 
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 this paragraph (c)(2) apply to all relevant 
counterparties for risk-based capital purposes unless the national bank 
or Federal savings association is treating the OTC

[[Page 67]]

credit derivative as a covered position under subpart F, in which case 
the national bank or Federal savings association must compute a 
supplemental counterparty credit risk capital requirement under this 
section.
    (d) Counterparty credit risk for OTC equity derivatives. (1) A 
national bank or Federal savings association 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 Secs. 3.51 
through 3.53 (unless the national bank or Federal savings association is 
treating the contract as a covered position under subpart F of this 
part).
    (2) In addition, the national bank or Federal savings association 
must also calculate a risk-based capital requirement for the 
counterparty credit risk of an OTC equity derivative contract under this 
section if the national bank or Federal savings association is treating 
the contract as a covered position under subpart F of this part.
    (3) If the national bank or Federal savings association risk weights 
the contract under the Simple Risk-Weight Approach (SRWA) in Sec. 3.52, 
the national bank or Federal savings association 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 national bank or Federal savings 
association using the SRWA must either include all or exclude all of the 
contracts from any measure used to determine counterparty credit risk 
exposure.
    (e) Clearing member national bank's or Federal savings association's 
exposure amount. A clearing member national bank's or Federal savings 
association's exposure amount for an OTC derivative contract or netting 
set of OTC derivative contracts where the national bank or Federal 
savings association is either acting as a financial intermediary and 
enters into an offsetting transaction with a QCCP or where the national 
bank or Federal savings association provides a guarantee to the QCCP on 
the performance of the client equals the exposure amount calculated 
according to paragraph (a)(1) or (2) of this section multiplied by the 
scaling factor 0.71. If the national bank or Federal savings association 
determines that a longer period is appropriate, the national bank or 
Federal savings association must use a larger scaling factor to adjust 
for a longer holding period as follows:
[GRAPHIC] [TIFF OMITTED] TR11OC13.015

    where

H = the holding period greater than five days. Additionally, the OCC may 
          require the national bank or Federal savings association to 
          set a longer holding period if the OCC determines that a 
          longer period is appropriate due to the nature, structure, or 
          characteristics of the transaction or is commensurate with the 
          risks associated with the transaction.



Sec. 3.35  Cleared transactions.

    (a) General requirements--(1) Clearing member clients. A national 
bank or Federal savings association 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) Clearing members. A national bank or Federal savings association 
that is a clearing member must use the methodologies described in 
paragraph (c) of this section to calculate its risk-weighted assets for 
a cleared transaction and paragraph (d) of this section to calculate its 
risk-weighted assets for its default fund contribution to a CCP.
    (b) Clearing member client national banks or Federal savings 
associations--(1) Risk-weighted assets for cleared transactions. (i) To 
determine the risk-weighted asset amount for a cleared transaction, a 
national bank or Federal

[[Page 68]]

savings association 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 national bank's or Federal savings 
association'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 
either a derivative contract or a 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. 3.34; 
plus
    (B) The fair value of the collateral posted by the clearing member 
client national bank or Federal savings association and held by the CCP, 
clearing member, or custodian in a manner that is not bankruptcy remote.
    (ii) For a cleared transaction that is a repo-style transaction or 
netting set of repo-style transactions, the trade exposure amount 
equals:
    (A) The exposure amount for the repo-style transaction calculated 
using the methodologies under Sec. 3.37(c); plus
    (B) The fair value of the collateral posted by the clearing member 
client national bank or Federal savings association and held by the CCP, 
clearing member, or custodian 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 national bank or Federal savings 
association must apply a risk weight of:
    (A) 2 percent if the collateral posted by the national bank or 
Federal savings association to the QCCP or clearing member is subject to 
an arrangement that prevents any losses to the clearing member client 
national bank or Federal savings association 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 national bank or Federal savings 
association 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 an event of default or from liquidation, insolvency, or 
receivership proceedings) 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 if the requirements of Sec. 3.35(b)(3)(A) are not met.
    (ii) For a cleared transaction with a CCP that is not a QCCP, a 
clearing member client national bank or Federal savings association must 
apply the risk weight appropriate for the CCP according to Sec. 3.32.
    (4) Collateral. (i) Notwithstanding any other requirements in this 
section, collateral posted by a clearing member client national bank or 
Federal savings association that is held by a custodian (in its capacity 
as custodian) in a manner that is bankruptcy remote from the CCP, the 
custodian, clearing member and other clearing member clients of the 
clearing member, is not subject to a capital requirement under this 
section.
    (ii) A clearing member client national bank or Federal savings 
association must calculate a risk-weighted asset amount for any 
collateral provided to a CCP, clearing member, or custodian in 
connection with a cleared transaction in accordance with the 
requirements under Sec. 3.32.
    (c) Clearing member national banks or Federal savings associations--
(1) Risk-weighted assets for cleared transactions.
    (i) To determine the risk-weighted asset amount for a cleared 
transaction, a clearing member national bank or Federal savings 
association 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.

[[Page 69]]

    (ii) A clearing member national bank's or Federal savings 
association'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 national bank or 
Federal savings association must calculate its trade exposure amount for 
a cleared transaction as follows:
    (i) For a cleared transaction that is either a derivative contract 
or a netting set of derivative contracts, 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. 3.34; plus
    (B) The fair value of the collateral posted by the clearing member 
national bank or Federal savings association and held by the CCP in a 
manner that is not bankruptcy remote.
    (ii) For a cleared transaction that is a repo-style transaction or 
netting set of repo-style transactions, trade exposure amount equals:
    (A) The exposure amount for repo-style transactions calculated using 
methodologies under Sec. 3.37(c); plus
    (B) The fair value of the collateral posted by the clearing member 
national bank or Federal savings association and held by the CCP in a 
manner that is not bankruptcy remote.
    (3) Cleared transaction risk weight. (i) A clearing member national 
bank or Federal savings association must apply a risk weight of 2 
percent to the trade exposure amount for a cleared transaction with a 
QCCP.
    (ii) For a cleared transaction with a CCP that is not a QCCP, a 
clearing member national bank or Federal savings association must apply 
the risk weight appropriate for the CCP according to Sec. 3.32.
    (4) Collateral. (i) Notwithstanding any other requirement in this 
section, collateral posted by a clearing member national bank or Federal 
savings association 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 clearing member national bank or Federal savings association 
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. 3.32.
    (d) Default fund contributions. (1) General requirement. A clearing 
member national bank or Federal savings association 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 national 
bank or Federal savings association or the OCC, 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 national bank's or Federal 
savings association'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, or an amount determined 
by the OCC, based on factors such as size, structure and membership 
characteristics of the CCP and riskiness of its transactions, in cases 
where such default fund contributions may be unlimited.
    (3) Risk-weighted asset amount for default fund contributions to 
QCCPs. A clearing member national bank's or Federal savings 
association'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 the methodology set forth in paragraphs 
(d)(3)(i) through (iii) of this section (Method 1), multiplied by 1,250 
percent or in paragraphs (d)(3)(iv) of this section (Method 2).
    (i) Method 1. The hypothetical capital requirement of a QCCP 
(KCCP) equals:
[GRAPHIC] [TIFF OMITTED] TR11OC13.058



[[Page 70]]


    (A) EBRMi = the exposure amount for each transaction 
cleared through the QCCP by clearing member i, calculated in accordance 
with Sec. 3.34 for OTC derivative contracts and Sec. 3.37(c)(2) for 
repo-style transactions, provided that:
    (1) For purposes of this section, in calculating the exposure amount 
the national bank or Federal savings association may replace the formula 
provided in Sec. 3.34(a)(2)(ii) with the following: Anet = (0.15 x 
Agross) + (0.85 x NGR x Agross); and
    (2) For option derivative contracts that are cleared transactions, 
the PFE described in Sec. 3.34(a)(1)(ii) must be adjusted by multiplying 
the notional principal amount of the derivative contract by the 
appropriate conversion factor in Table 1 to Sec. 3.34 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.
    (3) For repo-style transactions, when applying Sec. 3.37(c)(2), the 
national bank or Federal savings association must use the methodology in 
Sec. 3.37(c)(3);
    (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 has actually received from 
clearing member i;
    (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;
    (E) RW = 20 percent, except when the OCC has determined that a 
higher risk weight is more appropriate based on the specific 
characteristics of the QCCP and its clearing members; and
    (F) Where a QCCP has provided its KCCP, a national bank 
or Federal savings association must rely on such disclosed figure 
instead of calculating KCCP under this paragraph (d), unless 
the national bank or Federal savings association determines that a more 
conservative figure is appropriate based on the nature, structure, or 
characteristics of the QCCP.
    (ii) For a national bank or Federal savings association that is a 
clearing member of a QCCP with a default fund supported by funded 
commitments, KCM equals:
[GRAPHIC] [TIFF OMITTED] TR11OC13.016

    Subscripts 1 and 2 denote the clearing members with the two largest 
ANet values. For purposes of this paragraph (d), for 
derivatives ANet is defined in Sec. 3.34(a)(2)(ii) and for 
repo-style transactions, ANet means the exposure amount as 
defined in Sec. 3.37(c)(2) using the methodology in Sec. 3.37(c)(3);

[[Page 71]]

    (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] TR11OC13.017


[[Page 72]]



Where:

    (1) DFi = the national bank's or Federal savings 
association's unfunded commitment to the default fund;
    (2) DFCM = the total of all clearing members' unfunded 
commitment to the default fund; and
    (3) K*CM as defined in paragraph (d)(3)(ii) of this section.
    (B) For a national bank or Federal savings association 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:
[GRAPHIC] [TIFF OMITTED] TR11OC13.018


Where:

    (1) IMi = the national bank's or Federal savings 
association's initial margin posted to the QCCP;
    (2) IMCM = the total of initial margin posted to the 
QCCP; and
    (3)K*CM as defined in paragraph (d)(3)(ii) of this section.
    (iv) Method 2. A clearing member national bank's or Federal savings 
association's risk-weighted asset amount for its default fund 
contribution to a QCCP, RWADF, equals:

RWADF = Min {12.5 * DF; 0.18 * TE{time} 


Where:

    (A) TE = the national bank's or Federal savings association's trade 
exposure amount to the QCCP, calculated according to section 35(c)(2);
    (B) DF = the funded portion of the national bank's or Federal 
savings association's default fund contribution to the QCCP.
    (4) Total risk-weighted assets for default fund contributions. Total 
risk-weighted assets for default fund contributions is the sum of a 
clearing member national bank's or Federal savings association's risk-
weighted assets for all of its default fund contributions to all CCPs of 
which the national bank or Federal savings association is a clearing 
member.



Sec. 3.36  Guarantees and credit derivatives: substitution treatment.

    (a) Scope--(1) General. A national bank or Federal savings 
association 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 national bank or Federal savings association 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 Secs. 3.41 through 3.45.
    (4) If multiple eligible guarantees or eligible credit derivatives 
cover a single exposure described in this section, a national bank or 
Federal savings association 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 national bank or Federal savings association must treat each 
hedged exposure as covered by a separate eligible guarantee or eligible 
credit derivative and

[[Page 73]]

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 national bank or Federal savings 
association may only recognize the credit risk mitigation benefits of 
eligible guarantees and eligible credit derivatives.
    (2) A national bank or Federal savings association 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 national bank or Federal 
savings association 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. 3.32 for the risk weight 
assigned to the exposure.
    (2) Partial coverage. If an eligible guarantee or eligible credit 
derivative meets the conditions in Secs. 3.36(a) and 3.37(b) and the 
protection amount (P) of the guarantee or credit derivative is less than 
the exposure amount of the hedged exposure, the national bank or Federal 
savings association 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 national bank or Federal savings association may calculate 
the risk-weighted asset amount for the protected exposure under 
Sec. 3.32, where the applicable risk weight is the risk weight 
applicable to the guarantor or credit derivative protection provider.
    (ii) The national bank or Federal savings association must calculate 
the risk-weighted asset amount for the unprotected exposure under 
Sec. 3.32, where the applicable risk weight is that of the unprotected 
portion of the hedged exposure.
    (iii) 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 national bank or Federal 
savings association 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 national bank or Federal savings association (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 national bank or Federal savings 
association (protection purchaser), but the terms of the arrangement at 
origination of

[[Page 74]]

the credit risk mitigant contain a positive incentive for the national 
bank or Federal savings association 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 national bank or Federal 
savings association 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 national bank or Federal savings association 
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 national bank 
or Federal savings association 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 national bank or Federal 
savings association 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 national bank or Federal 
savings association 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 national bank or Federal savings association 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 national bank or Federal savings 
association 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. 3.37(c)(4).
    (3) A national bank or Federal savings association must adjust 
HFX calculated in paragraph (f)(2) of this section upward if 
the national bank or Federal savings association 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] TR11OC13.021


[[Page 75]]





Sec. 3.37  Collateralized transactions.

    (a) General. (1) To recognize the risk-mitigating effects of 
financial collateral, a national bank or Federal savings association may 
use:
    (i) The simple approach in paragraph (b) of this section for any 
exposure; or
    (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 national bank or Federal savings association 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 national 
bank or Federal savings association may recognize the credit risk 
mitigation benefits of financial collateral that secures any exposure.
    (ii) To qualify for the simple approach, the financial 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 national bank or Federal savings 
association may apply a risk weight to the portion of an exposure that 
is secured by the fair value of financial collateral (that meets the 
requirements of paragraph (b)(1) of this section) based on the risk 
weight assigned to the collateral under Sec. 3.32. For repurchase 
agreements, reverse repurchase agreements, and securities lending and 
borrowing transactions, the collateral is the instruments, gold, and 
cash the national bank or Federal savings association 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 national bank or Federal savings association must apply a 
risk weight to the unsecured portion of the exposure based on the risk 
weight applicable 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 national bank or Federal savings association 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 national bank or Federal savings association 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. 3.32.
    (iii) A national bank or Federal savings association may assign a 
zero percent risk weight to the collateralized portion of an exposure 
where:
    (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. 3.32, and the 
national bank or Federal savings association has discounted the fair 
value of the collateral by 20 percent.
    (c) Collateral haircut approach--(1) General. A national bank or 
Federal savings association 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 national bank's 
or Federal savings association's VaR-based measure under subpart F of 
this part by using the collateral haircut approach in this section. A 
national bank or Federal savings association may use the standard 
supervisory haircuts in paragraph (c)(3) of this section or, with

[[Page 76]]

prior written approval of the OCC, its own estimates of haircuts 
according to paragraph (c)(4) of this section.
    (2) Exposure amount equation. A national bank or Federal savings 
association 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, [([Sigma]E - [Sigma]C) + [Sigma](Es x Hs) + 
[Sigma](Efx x Hfx)]{time} , where:
    (i)(A) For eligible margin loans and repo-style transactions and 
netting sets thereof, [Sigma]E equals the value of the exposure (the sum 
of the current fair values of all instruments, gold, and cash the 
national bank or Federal savings association 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, [Sigma]E equals the exposure amount of the OTC derivative 
contract (or netting set) calculated under Sec. 3.34 (a)(1) or (2).
    (ii) [Sigma]C equals the value of the collateral (the sum of the 
current fair values of all instruments, gold and cash the national bank 
or Federal savings association 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 fair values of the instrument or gold the 
national bank or Federal savings association has lent, sold subject to 
repurchase, or posted as collateral to the counterparty minus the sum of 
the current fair values of that same instrument or gold the national 
bank or Federal savings association 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 fair values of any instruments or cash in the currency the 
national bank or Federal savings association has lent, sold subject to 
repurchase, or posted as collateral to the counterparty minus the sum of 
the current fair values of any instruments or cash in the currency the 
national bank or Federal savings association 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 national bank or Federal 
savings association must use the haircuts for market price volatility 
(Hs) provided in Table 1 to Sec. 3.37, as adjusted in certain 
circumstances in accordance with the requirements of paragraphs 
(c)(3)(iii) and (iv) of this section.

                Table 1 toSec. 3.37--Standard Supervisory Market Price Volatility Haircuts \1\
----------------------------------------------------------------------------------------------------------------
                                             Haircut (in percent) assigned based on:
                               ------------------------------------------------------------------   Investment
                                 Sovereign issuers risk weight      Non-sovereign issuers risk         grade
       Residual maturity         underSec. 3.32 (in percent)     weight underSec. 3.32 (in    securitization
                                              \2\                            percent)              exposures (in
                               ------------------------------------------------------------------    percent)
                                   Zero     20 or 50     100         20         50        100
----------------------------------------------------------------------------------------------------------------
Less than or equal to 1 year..        0.5        1.0       15.0        1.0        2.0        4.0             4.0
Greater than 1 year and less          2.0        3.0       15.0        4.0        6.0        8.0            12.0
 than or equal to 5 years.....
Greater than 5 years..........        4.0        6.0       15.0        8.0       12.0       16.0            24.0
----------------------------------------------------------------------------------------------------------------
Main index equities (including convertible bonds) a15.0old.....
----------------------------------------------------------------------------------------------------------------
Other publicly traded equities (including convertib25.0onds)...
----------------------------------------------------------------------------------------------------------------
Mutual funds....................Highest haircut applicable to any security
                                       in which the fund can invest.
----------------------------------------------------------------------------------------------------------------

[[Page 77]]

 
Cash collateral held...............................Zero........
----------------------------------------------------------------------------------------------------------------
Other exposure types...............................25.0........
----------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircuts in Table 1 toSec. 3.37 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 national bank or Federal savings 
association 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 national bank or Federal 
savings association may multiply the standard supervisory haircuts 
provided in paragraphs (c)(3)(i) and (ii) of this section by the square 
root of \1/2\ (which equals 0.707107).
    (iv) If the number of trades in a netting set exceeds 5,000 at any 
time during a quarter, a national bank or Federal savings association 
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. 3.35. If a netting set 
contains one or more trades involving illiquid collateral or an OTC 
derivative that cannot be easily replaced, a national bank or Federal 
savings association 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 that lasted more than the holding period, then the national 
bank or Federal savings association 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 
national bank or Federal savings association must adjust the standard 
supervisory haircuts upward using the following formula:
[GRAPHIC] [TIFF OMITTED] TR11OC13.022

    (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 national bank or Federal savings association 
has lent, sold subject to repurchase, or posted as collateral does not 
meet the definition of financial collateral, the national bank or 
Federal savings association 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 OCC, a national bank or Federal savings association may 
calculate haircuts (Hs and Hfx) using its own internal estimates of the 
volatilities of market prices and foreign exchange rates:
    (i) To receive OCC approval to use its own internal estimates, a 
national bank or Federal savings association

[[Page 78]]

must satisfy the following minimum standards:
    (A) A national bank or Federal savings association 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 national bank or Federal savings 
association 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] TR11OC13.023

    (1) TM equals 5 for repo-style transactions and 10 for 
eligible margin loans;
    (2) TN equals the holding period used by the national 
bank or Federal savings association 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 national bank or Federal savings association 
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. 3.35. If a netting set contains one 
or more trades involving illiquid collateral or an OTC derivative that 
cannot be easily replaced, a national bank or Federal savings 
association 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 national bank or Federal savings association 
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 national bank or Federal savings association 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 national bank or Federal savings association must have 
policies and procedures that describe how it determines the period of 
significant financial stress used to calculate the national bank's or 
Federal savings association's own internal estimates for haircuts under 
this section and must be able to provide empirical support for the 
period used. The national bank or Federal savings association must 
obtain the prior approval of the OCC for, and notify the OCC if the 
national bank or Federal savings association makes any material changes 
to, these policies and procedures.
    (F) Nothing in this section prevents the OCC from requiring a 
national bank or Federal savings association to use a different period 
of significant financial stress in the calculation of own internal 
estimates for haircuts.
    (G) A national bank or Federal savings association 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 
national bank or Federal savings association may calculate haircuts for 
categories of securities. For a category of securities, the national 
bank or Federal savings association must calculate the haircut on the 
basis of internal volatility estimates for securities in that category 
that are representative of the

[[Page 79]]

securities in that category that the national bank or Federal savings 
association has lent, sold subject to repurchase, posted as collateral, 
borrowed, purchased subject to resale, or taken as collateral. In 
determining relevant categories, the national bank or Federal savings 
association 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 national bank or Federal savings association 
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 national bank or Federal savings association 
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 national bank's or Federal savings association'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. 3.38  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) 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 national bank or Federal savings 
association 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 
national bank or Federal savings association to the counterparty.
    (b) Scope. This section applies to all transactions involving 
securities, foreign exchange instruments, and commodities that have a 
risk of delayed settlement or delivery. This section does not apply to:
    (1) 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. 3.34).
    (c) System-wide failures. In the case of a system-wide failure of a 
settlement, clearing system or central counterparty, the OCC 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 national bank or Federal savings association must hold 
risk-based capital against any DvP or PvP transaction with a normal 
settlement

[[Page 80]]

period if the national bank's or Federal savings association's 
counterparty has not made delivery or payment within five business days 
after the settlement date. The national bank or Federal savings 
association must determine its risk-weighted asset amount for such a 
transaction by multiplying the positive current exposure of the 
transaction for the national bank or Federal savings association by the 
appropriate risk weight in Table 1 to Sec. 3.38.

      Table 1 toSec. 3.38--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
------------------------------------------------------------------------

    (e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-versus-
payment) transactions. (1) A national bank or Federal savings 
association must hold risk-based capital against any non-DvP/non-PvP 
transaction with a normal settlement period if the national bank or 
Federal savings association 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 national bank or 
Federal savings association must continue to hold risk-based capital 
against the transaction until the national bank or Federal savings 
association has received its corresponding deliverables.
    (2) From the business day after the national bank or Federal savings 
association has made its delivery until five business days after the 
counterparty delivery is due, the national bank or Federal savings 
association must calculate the risk-weighted asset amount for the 
transaction by treating the current fair value of the deliverables owed 
to the national bank or Federal savings association as an exposure to 
the counterparty and using the applicable counterparty risk weight under 
Sec. 3.32.
    (3) If the national bank or Federal savings association has not 
received its deliverables by the fifth business day after counterparty 
delivery was due, the national bank or Federal savings association must 
assign a 1,250 percent risk weight to the current fair value of the 
deliverables owed to the national bank or Federal savings association.
    (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.



Secs. 3.39-3.40  [Reserved]

            Risk-Weighted Assets for Securitization Exposures



Sec. 3.41  Operational requirements for securitization exposures.

    (a) Operational criteria for traditional securitizations. A national 
bank or Federal savings association 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 national bank or Federal savings 
association that meets these conditions must hold risk-based capital 
against any credit risk it retains in connection with the 
securitization. A national bank or Federal savings association 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 national bank's or Federal 
savings association's consolidated balance sheet under GAAP;
    (2) The national bank or Federal savings association has transferred 
to one or more third parties credit risk associated with the underlying 
exposures;
    (3) Any clean-up calls relating to the securitization are eligible 
clean-up calls; and
    (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

[[Page 81]]

    (ii) Contain an early amortization provision.
    (b) Operational criteria for synthetic securitizations. For 
synthetic securitizations, a national bank or Federal savings 
association 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 (b) is satisfied. A national bank or Federal 
savings association 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 national bank or Federal 
savings association 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:
    (i) Financial collateral;
    (ii) A guarantee that meets all criteria as set forth in the 
definition of ``eligible guarantee'' in Sec. 3.2, except for the 
criteria in paragraph (3) of that definition; or
    (iii) A credit derivative that meets all criteria as set forth in 
the definition of ``eligible credit derivative'' in Sec. 3.2, except for 
the criteria in paragraph (3) of the definition of ``eligible 
guarantee'' in Sec. 3.2.
    (2) The national bank or Federal savings association 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 national bank or Federal savings association to 
alter or replace the underlying exposures to improve the credit quality 
of the underlying exposures;
    (iii) Increase the national bank's or Federal savings association'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 national 
bank or Federal savings association 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 national bank or Federal savings 
association after the inception of the securitization;
    (3) The national bank or Federal savings association 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 for securitization exposures. (1) 
Except for exposures that are deducted from common equity tier 1 capital 
and exposures subject to Sec. 3.42(h), if a national bank or Federal 
savings association is unable to demonstrate to the satisfaction of the 
OCC a comprehensive understanding of the features of a securitization 
exposure that would materially affect the performance of the exposure, 
the national bank or Federal savings association must assign the 
securitization exposure a risk weight of 1,250 percent. The national 
bank's or Federal savings association'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 national bank or Federal savings association must demonstrate 
its comprehensive understanding of a securitization exposure under 
paragraph (c)(1) of this section, for each securitization exposure by:
    (i) Conducting an analysis of the risk characteristics of a 
securitization exposure prior to acquiring the exposure, and documenting 
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, fair value triggers, the

[[Page 82]]

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) 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; and
    (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. 3.42  Risk-weighted assets for securitization exposures.

    (a) Securitization risk weight approaches. Except as provided 
elsewhere in this section or in Sec. 3.41:
    (1) A national bank or Federal savings association must deduct from 
common equity tier 1 capital 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 national bank or Federal savings 
association may assign a risk weight to the securitization exposure 
using the simplified supervisory formula approach (SSFA) in accordance 
with Secs. 3.43(a) through 3.43(d) and subject to the limitation under 
paragraph (e) of this section. Alternatively, a national bank or Federal 
savings association that is not subject to subpart F of this part may 
assign a risk weight to the securitization exposure using the gross-up 
approach in accordance with Sec. 3.43(e), provided, however, that such 
national bank or Federal savings association must apply either the SSFA 
or the gross-up approach consistently across all of its securitization 
exposures, except as provided in paragraphs (a)(1), (a)(3), and (a)(4) 
of this section.
    (3) If a securitization exposure does not require deduction under 
paragraph (a)(1) of this section and the national bank or Federal 
savings association cannot, or chooses not to apply the SSFA or the 
gross-up approach to the exposure, the national bank or Federal savings 
association must assign a risk weight to the exposure as described in 
Sec. 3.44.
    (4) If a securitization exposure is a derivative contract (other 
than protection provided by a national bank or Federal savings 
association in the form of 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 national bank or 
Federal savings association 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 
national bank's or Federal savings association's total risk-weighted 
assets for securitization exposures equals the sum of the risk-weighted 
asset amount for securitization exposures that the national bank or 
Federal savings association risk weights under Secs. 3.41(c), 
3.42(a)(1), and 3.43, 3.44, or 3.45, and paragraphs (e) through (j) of 
this section, as applicable.
    (c) Exposure amount of a securitization exposure--(1) On-balance 
sheet securitization exposures. The exposure amount of an on-balance 
sheet securitization exposure (excluding an available-for-sale or held-
to-maturity security where the national bank or Federal savings 
association has made an AOCI opt-out election under

[[Page 83]]

Sec. 3.22(b)(2), a repo-style transaction, eligible margin loan, OTC 
derivative contract, or cleared transaction) is equal to the carrying 
value of the exposure.
    (2) On-balance sheet securitization exposures held by a national 
bank or Federal savings association that has made an AOCI opt-out 
election. The exposure amount of an on-balance sheet securitization 
exposure that is an available-for-sale or held-to-maturity security held 
by a national bank or Federal savings association that has made an AOCI 
opt-out election under Sec. 3.22(b)(2) is the national bank's or Federal 
savings association's carrying value (including net accrued but unpaid 
interest and fees), less any net unrealized gains on the exposure and 
plus any net unrealized losses on the exposure.
    (3) Off-balance sheet securitization exposures. (i) Except as 
provided in paragraph (j) of this section, the exposure amount of an 
off-balance sheet securitization exposure that is not a repo-style 
transaction, eligible margin loan, cleared transaction (other than a 
credit derivative), or an OTC derivative contract (other than a credit 
derivative) is the notional amount of the exposure. For an off-balance 
sheet securitization exposure to an ABCP program, such as an eligible 
ABCP liquidity facility, the notional amount may be reduced to the 
maximum potential amount that the national bank or Federal savings 
association 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 national bank or Federal savings association 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 national bank or Federal savings association 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.
    (4) 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. 3.34 or Sec. 3.37, as applicable.
    (d) Overlapping exposures. If a national bank or Federal savings 
association has multiple securitization exposures that provide 
duplicative coverage to the underlying exposures of a securitization 
(such as when a national bank or Federal savings association provides a 
program-wide credit enhancement and multiple pool-specific liquidity 
facilities to an ABCP program), the national bank or Federal savings 
association is not required to hold duplicative risk-based capital 
against the overlapping position. Instead, the national bank or Federal 
savings association 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 national bank or Federal savings 
association provides support to a securitization in excess of the 
national bank's or Federal savings association's contractual obligation 
to provide credit support to the securitization (implicit support):
    (1) The national bank or Federal savings association 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 national bank or Federal savings association must disclose 
publicly:
    (i) That it has provided implicit support to the securitization; and
    (ii) The risk-based capital impact to the national bank or Federal 
savings association of providing such implicit support.
    (f) Undrawn portion of a servicer cash advance facility. (1) 
Notwithstanding any other provision of this subpart, a national bank or 
Federal savings association that is a servicer under an eligible 
servicer cash advance facility is not required to hold risk-based 
capital against potential future cash advance payments that it may be 
required to

[[Page 84]]

provide under the contract governing the facility.
    (2) For a national bank or Federal savings association that acts as 
a servicer, the exposure amount for a servicer cash advance facility 
that is not an eligible servicer cash advance facility is equal to the 
amount of all potential future cash advance payments that the national 
bank or Federal savings association may be contractually required to 
provide during the subsequent 12 month period under the contract 
governing the facility.
    (g) Interest-only mortgage-backed securities. Regardless of any 
other provisions in 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 
provision of this subpart, a national bank or Federal savings 
association that has transferred small-business loans and leases on 
personal property (small-business obligations) with recourse 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 national bank or Federal savings association establishes 
and maintains, pursuant to GAAP, a non-capital reserve sufficient to 
meet the national bank's or Federal savings association'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 (15 U.S.C. 
632 et seq.).
    (iv) The national bank or Federal savings association is well 
capitalized, as defined in 12 CFR 6.4. For purposes of determining 
whether a national bank or Federal savings association is well 
capitalized for purposes of this paragraph (h), the national bank's or 
Federal savings association's capital ratios must be calculated without 
regard to the capital treatment for transfers of small-business 
obligations under this paragraph (h).
    (2) The total outstanding amount of contractual exposure retained by 
a national bank or Federal savings association on transfers of small-
business obligations receiving the capital treatment specified in 
paragraph (h)(1) of this section cannot exceed 15 percent of the 
national bank's or Federal savings association's total capital.
    (3) If a national bank or Federal savings association ceases to be 
well capitalized under 12 CFR 6.4 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 national bank or Federal 
savings association was well capitalized and did not exceed the capital 
limit.
    (4) The risk-based capital ratios of the national bank or Federal 
savings association 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 national bank or Federal savings 
association is adequately capitalized, undercapitalized, significantly 
undercapitalized, or critically undercapitalized under the OCC's prompt 
corrective action regulations; and
    (ii) Reclassifying a well-capitalized national bank or Federal 
savings association to adequately capitalized and requiring an 
adequately capitalized national bank or Federal savings association to 
comply with certain mandatory or discretionary supervisory actions as if 
the national bank or Federal savings association were in the next lower 
prompt-corrective-action category.
    (i) Nth-to-default credit derivatives--(1) Protection provider. A 
national bank or Federal savings association may assign a risk weight 
using the SSFA in Sec. 3.43 to an nth-to-default credit 
derivative in accordance with this paragraph (i). A national bank or 
Federal savings association must determine its exposure in the 
nth-to-default credit derivative as

[[Page 85]]

the largest notional 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 national 
bank or Federal savings association 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 national bank's or Federal savings association's exposure to the 
total notional amount of all underlying exposures. The ratio is 
expressed as a decimal value between zero and one. In the case of a 
first-to-default credit derivative, there are no underlying exposures 
that are subordinated to the national bank's or Federal savings 
association'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 national bank's or Federal savings 
association's exposure.
    (ii) The detachment point (parameter D) equals the sum of parameter 
A plus the ratio of the notional amount of the national bank's or 
Federal savings association's exposure in the nth-to-default 
credit derivative to the total notional amount of all underlying 
exposures. The ratio is expressed as a decimal value between zero and 
one.
    (3) A national bank or Federal savings association 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 
national bank or Federal savings association 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. 3.36(b) 
must determine its risk-based capital requirement for the underlying 
exposures as if the national bank or Federal savings association 
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 national bank or Federal savings 
association must calculate a risk-based capital requirement for 
counterparty credit risk according to Sec. 3.34 for a first-to-default 
credit derivative that does not meet the rules of recognition of 
Sec. 3.36(b).
    (ii) Second-or-subsequent-to-default credit derivatives. (A) A 
national bank or Federal savings association 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. 3.36(b) (other than a first-to-default credit derivative) may 
recognize the credit risk mitigation benefits of the derivative only if:
    (1) The national bank or Federal savings association 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 national bank or Federal savings association satisfies the 
requirements of paragraph (i)(4)(ii)(A) of this section, the national 
bank or Federal savings association must determine its risk-based 
capital requirement for the underlying exposures as if the national bank 
or Federal savings association had only synthetically securitized the 
underlying exposure with the nth smallest risk-weighted asset 
amount and had obtained no credit risk mitigant on the other underlying 
exposures.
    (C) A national bank or Federal savings association must calculate a 
risk-based capital requirement for counterparty credit risk according to 
Sec. 3.34 for a nth-to-default credit derivative that does 
not meet the rules of recognition of Sec. 3.36(b).
    (j) Guarantees and credit derivatives other than nth-to-default 
credit derivatives--(1) Protection provider. For a guarantee or credit 
derivative (other than an nth-to-default credit derivative) 
provided by a national bank or Federal savings association that covers 
the full amount or a pro rata share of a securitization exposure's 
principal and interest, the national bank or Federal savings association 
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.

[[Page 86]]

    (2) Protection purchaser. (i) A national bank or Federal savings 
association that purchases a guarantee or OTC credit derivative (other 
than an nth-to-default credit derivative) that is recognized 
under Sec. 3.45 as a credit risk mitigant (including via collateral 
recognized under Sec. 3.37) is not required to compute a separate 
counterparty credit risk capital requirement under Sec. 3.31, in 
accordance with 34(c).
    (ii) If a national bank or Federal savings association cannot, or 
chooses not to, recognize a purchased credit derivative as a credit risk 
mitigant under Sec. 3.45, the national bank or Federal savings 
association must determine the exposure amount of the credit derivative 
under Sec. 3.34.
    (A) If the national bank or Federal savings association purchases 
credit protection from a counterparty that is not a securitization SPE, 
the national bank or Federal savings association must determine the risk 
weight for the exposure according to general risk weights under 
Sec. 3.32.
    (B) If the national bank or Federal savings association purchases 
the credit protection from a counterparty that is a securitization SPE, 
the national bank or Federal savings association must determine the risk 
weight for the exposure according to section Sec. 3.42, including 
Sec. 3.42(a)(4) for a credit derivative that has a first priority claim 
on the cash flows from the underlying exposures of the securitization 
SPE (notwithstanding amounts due under interest rate or currency 
derivative contracts, fees due, or other similar payments).

[78 FR 62157, 62273, 62274, Oct. 11, 2013]



Sec. 3.43  Simplified supervisory formula approach (SSFA) and the
gross-up approach.

    (a) General requirements for the SSFA. To use the SSFA to determine 
the risk weight for a securitization exposure, a national bank or 
Federal savings association 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; if the contracts 
governing the underlying exposures of the securitization require 
payments on a monthly or quarterly basis, the data used to assign the 
parameters described in paragraph (b) of this section must be no more 
than 91 calendar days old. A national bank or Federal savings 
association that does not have the appropriate data to assign the 
parameters described in paragraph (b) of 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 national bank or Federal 
savings association 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 one (that is, an average 
risk weight of 100 percent represents a value of KG equal to 
0.08).
    (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 of the securitization that meet any of the criteria 
as set forth in paragraphs (b)(2)(i) through (vi) of this section to the 
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 payments for 90 days or more, other 
than principal or interest payments deferred on:
    (A) Federally-guaranteed student loans, in accordance with the terms 
of those guarantee programs; or
    (B) Consumer loans, including non-federally-guaranteed student 
loans, provided that such payments are deferred pursuant to provisions 
included in the contract at the time funds are disbursed that provide 
for period(s) of deferral that are not initiated based on changes in the 
creditworthiness of the borrower; or
    (vi) Is in default.

[[Page 87]]

    (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. Except as provided in Sec. 3.42(i) for nth-
to-default credit derivatives, parameter A equals the ratio of the 
current dollar amount of underlying exposures that are subordinated to 
the exposure of the national bank or Federal savings association 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 national bank's or Federal savings association'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. Except as 
provided in section 42(i) for nth-to-default credit 
derivatives, 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 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 
securitization exposure, as appropriate, is the larger of the risk 
weight determined in accordance with this paragraph (c) or paragraph (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 national bank or 
Federal savings association 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. For the purpose of this weighted-average 
calculation:

[[Page 88]]

[GRAPHIC] [TIFF OMITTED] TR11OC13.024

    (e) Gross-up approach--(1) Applicability. A national bank or Federal 
savings association that is not subject to subpart F of this part 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 to all of its 
securitization exposures, except as otherwise provided for certain 
securitization exposures in Secs. 3.44 and 3.45.
    (2) To use the gross-up approach, a national bank or Federal savings 
association must calculate the following four inputs:
    (i) Pro rata share, which is the par value of the national bank's or 
Federal

[[Page 89]]

savings association'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 par value of tranches that are 
more senior to the tranche in which the national bank's or Federal 
savings association's securitization resides;
    (iii) Exposure amount of the national bank's or Federal savings 
association's securitization exposure calculated under Sec. 3.42(c); and
    (iv) Risk weight, which is the weighted-average risk weight of 
underlying exposures of the securitization as calculated under this 
subpart.
    (3) Credit equivalent amount. The credit equivalent amount of a 
securitization exposure under this section equals the sum of:
    (i) The exposure amount of the national bank's or Federal savings 
association's securitization exposure; and
    (ii) 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 national bank or 
Federal savings association must apply the risk weight required 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 national bank or Federal savings association must assign a 
risk weight of not less than 20 percent to a securitization exposure.



Sec. 3.44  Securitization exposures to which the SSFA and gross-up
approach do not apply.

    (a) General requirement. A national bank or Federal savings 
association must assign a 1,250 percent risk weight to all 
securitization exposures to which the national bank or Federal savings 
association does not apply the SSFA or the gross-up approach under 
Sec. 3.43, except as set forth in this section.
    (b) Eligible ABCP liquidity facilities. A national bank or Federal 
savings association 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 national bank or Federal savings 
association 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 national bank or Federal savings association holding the 
exposure must not retain or provide protection to the first loss 
position.



Sec. 3.45  Recognition of credit risk mitigants for securitization 
exposures.

    (a) General. (1) An originating national bank or Federal savings 
association 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. 3.41 may recognize the credit risk 
mitigant under Secs. 3.36 or 3.37, but only as provided in this section.
    (2) An investing national bank or Federal savings association that 
has obtained a credit risk mitigant to hedge a securitization exposure 
may recognize the credit risk mitigant under Secs. 3.36 or 3.37, but 
only as provided in this section.
    (b) Mismatches. A national bank or Federal savings association must 
make

[[Page 90]]

any applicable adjustment to the protection amount of an eligible 
guarantee or credit derivative as required in Sec. 3.36(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 national bank or Federal savings association must use 
the longest residual maturity of any of the hedged exposures as the 
residual maturity of all hedged exposures.



Secs. 3.46-3.50  [Reserved]

                Risk-Weighted Assets for Equity Exposures



Sec. 3.51  Introduction and exposure measurement.

    (a) General. (1) To calculate its risk-weighted asset amounts for 
equity exposures that are not equity exposures to an investment fund, a 
national bank or Federal savings association must use the Simple Risk-
Weight Approach (SRWA) provided in 3.52. A national bank or Federal 
savings association must use the look-through approaches provided in 
Sec. 3.53 to calculate its risk-weighted asset amounts for equity 
exposures to investment funds.
    (2) A national bank or Federal savings association must treat an 
investment in a separate account (as defined in Sec. 3.2) as if it were 
an equity exposure to an investment fund as provided in Sec. 3.53.
    (3) Stable value protection. (i) Stable value protection means a 
contract where the provider of the contract is obligated to pay:
    (A) The policy owner of a separate account an amount equal to the 
shortfall between the fair value and cost basis of the separate account 
when the policy owner of the separate account surrenders the policy; or
    (B) The beneficiary of the contract an amount equal to the shortfall 
between the fair value and book value of a specified portfolio of 
assets.
    (ii) A national bank or Federal savings association that purchases 
stable value protection on its investment in a separate account must 
treat the portion of the carrying value of its investment in the 
separate account attributable to the stable value protection as an 
exposure to the provider of the protection and the remaining portion of 
the carrying value of its separate account as an equity exposure to an 
investment fund.
    (iii) A national bank or Federal savings association that provides 
stable value protection must treat the exposure as an equity derivative 
with an adjusted carrying value determined as the sum of paragraphs 
(b)(1) and (3) of this section.
    (b) Adjusted carrying value. For purposes of Secs. 3.51 through 
3.53, the adjusted carrying value of an equity exposure is:
    (1) For the on-balance sheet component of an equity exposure (other 
than an equity exposure that is classified as available-for-sale where 
the national bank or Federal savings association has made an AOCI opt-
out election under Sec. 3.22(b)(2)), the national bank's or Federal 
savings association's carrying value of the exposure;
    (2) For the on-balance sheet component of an equity exposure that is 
classified as available-for-sale where the national bank or Federal 
savings association has made an AOCI opt-out election under 
Sec. 3.22(b)(2), the national bank's or Federal savings association's 
carrying value of the exposure less any net unrealized gains on the 
exposure that are reflected in such carrying value but excluded from the 
national bank's or Federal savings association's regulatory capital 
components;
    (3) 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; and
    (4) For a commitment to acquire an equity exposure (an equity 
commitment), the effective notional principal amount of the exposure is 
multiplied

[[Page 91]]

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. 3.52  Simple risk-weight approach (SRWA).

    (a) General. Under the SRWA, a national bank's or Federal savings 
association's total risk-weighted assets for equity exposures equals the 
sum of the risk-weighted asset amounts for each of the national bank's 
or Federal savings association'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 national bank's or 
Federal savings association's individual equity exposures to an 
investment fund as determined under Sec. 3.53.
    (b) SRWA computation for individual equity exposures. A national 
bank or Federal savings association 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 (b).
    (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. 3.32 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 equity exposures 
set forth in this paragraph (b)(3) must be assigned a 100 percent risk 
weight.
    (i) Community development equity exposures. An equity exposure that 
qualifies as a community development investment under section 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.
    (ii) Effective portion of hedge pairs. The effective portion of a 
hedge pair.
    (iii) Non-significant equity exposures. Equity exposures, excluding 
significant investments in the capital of an unconsolidated financial 
institution in the form of common stock and 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. 3.2 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 national bank's or Federal savings association's total 
capital.
    (A) To compute the aggregate adjusted carrying value of a national 
bank's or Federal savings association's equity exposures for purposes of 
this section, the national bank or Federal savings association 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 national 
bank or Federal savings association does not know the actual holdings of 
the investment fund, the national bank or Federal savings association 
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

[[Page 92]]

the fund exceeds 100 percent, the national bank or Federal savings 
association 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 national bank's or Federal savings 
association's equity exposures qualify for a 100 percent risk weight 
under this paragraph (b), a national bank or Federal savings association 
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 non-publicly 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 in 
the form of common stock that are not deducted from capital pursuant to 
Sec. 3.22(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 
national bank or Federal savings association acquires at least one of 
the equity exposures); the documentation specifies the measure of 
effectiveness (E) the national bank or Federal savings association 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 
national bank or Federal savings association must measure E at least 
quarterly and must use one of three alternative measures of E as set 
forth in this paragraph (c).
    (i) Under the dollar-offset method of measuring effectiveness, the 
national bank or Federal savings association 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:

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[GRAPHIC] [TIFF OMITTED] TR11OC13.027

    (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. 3.53  Equity exposures to investment funds.

    (a) Available approaches. (1) Unless the exposure meets the 
requirements for a community development equity exposure under 
Sec. 3.52(b)(3)(i), a national bank or Federal savings association 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 paragraph (c) of this section, or the alterative modified 
look-through approach described paragraph (d) of this section, provided, 
however, that the minimum risk weight that may be assigned to an equity 
exposure under this section is 20 percent.
    (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. 3.52(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 national bank or Federal savings association does not use 
the full look-through approach, the national bank or Federal savings 
association must use the ineffective portion of the hedge pair as 
determined under Sec. 3.52(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 national bank or Federal savings 
association 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 the adjusted carrying value of each exposure were held directly 
by the national bank or Federal savings association) may set the risk-
weighted asset amount of the national bank's or Federal savings 
association'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

[[Page 94]]

the national bank or Federal savings association; and
    (2) The national bank's or Federal savings association'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 national 
bank's or Federal savings association'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 national bank or Federal 
savings association 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 national bank's or Federal savings association'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 
national bank or Federal savings association 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 national bank or Federal savings 
association must use the highest applicable risk weight. A national bank 
or Federal savings association 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.



Secs. 3.54-3.60  [Reserved]

                               Disclosures



Sec. 3.61  Purpose and scope.

    Sections 3.61-3.63 of this subpart establish public disclosure 
requirements related to the capital requirements described in subpart B 
of this part for a national bank or Federal savings association with 
total consolidated assets of $50 billion or more as reported on the 
national bank's or Federal savings association's most recent year-end 
Call Report that is not an advanced approaches national bank or Federal 
savings association making public disclosures pursuant to Sec. 3.172. An 
advanced approaches national bank or Federal savings association that 
has not received approval from the OCC to exit parallel run pursuant to 
Sec. 3.121(d) is subject to the disclosure requirements described in 
Secs. 3.62 and 3.63. Such a national bank or Federal savings association 
must comply with Sec. 3.62 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 national bank's or Federal savings association's 
total consolidated assets in the four most recent quarters as reported 
on the Call Report; or the average of the national bank's or Federal 
savings association's total consolidated assets in the most recent 
consecutive quarters as reported quarterly on the national bank's or 
Federal savings association's Call Report if the national bank or 
Federal savings association has not filed such a report for each of the 
most recent four quarters.

[[Page 95]]



Sec. 3.62  Disclosure requirements.

    (a) A national bank or Federal savings association described in 
Sec. 3.61 must provide timely public disclosures each calendar quarter 
of the information in the applicable tables in Sec. 3.63. If a 
significant change occurs, such that the most recent reported amounts 
are no longer reflective of the national bank's or Federal savings 
association'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 national 
bank's or Federal savings association's risk management objectives and 
policies, reporting system, and definitions) may be disclosed annually 
after the end of the fourth calendar quarter, provided that any 
significant changes are disclosed in the interim. The national bank's or 
Federal savings association's management may provide all of the 
disclosures required by Secs. 3.61 through 3.63 in one place on the 
national bank's or Federal savings association's public Web site or may 
provide the disclosures in more than one public financial report or 
other regulatory reports, provided that the national bank or Federal 
savings association publicly provides a summary table specifically 
indicating the location(s) of all such disclosures.
    (b) A national bank or Federal savings association described in 
Sec. 3.61 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 national bank or Federal savings association must attest that the 
disclosures meet the requirements of this subpart.
    (c) If a national bank or Federal savings association described in 
Sec. 3.61 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 OCC under the Freedom of Information 
Act (5 U.S.C. 552), then the national bank or Federal savings 
association 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. 3.63  Disclosures by national banks or Federal savings associations
described in Sec. 3.61.

    (a) Except as provided in Sec. 3.62, a national bank or Federal 
savings association described in Sec. 3.61 must make the disclosures 
described in Tables 1 through 10 of this section. The national bank or 
Federal savings association must make these disclosures publicly 
available for each of the last three years (that is, twelve quarters) or 
such shorter period beginning on January 1, 2015.
    (b) A national bank or Federal savings association 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.

[[Page 96]]



               Table 1 toSec. 3.63--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 \1\ 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.
                                (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.
------------------------------------------------------------------------
\1\ Entities include securities, insurance and other financial
  subsidiaries, commercial subsidiaries (where permitted), and
  significant minority equity investments in insurance, financial and
  commercial entities.


                Table 2 toSec. 3.63--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
                                                    adjustments and
                                                    deductions 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
                                                    adjustments and
                                                    deductions 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
                                                    adjustments and
                                                    deductions made to
                                                    total capital.
------------------------------------------------------------------------


                 Table 3 toSec. 3.63--Capital Adequacy
Qualitative disclosures.......  (a)..............  A summary discussion
                                                    of the national
                                                    bank's or Federal
                                                    savings
                                                    association'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.
                                (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 standardized
                                                    risk-weighted
                                                    assets.
------------------------------------------------------------------------


[[Page 97]]


           Table 4 toSec. 3.63--Capital Conservation Buffer
Quantitative Disclosures......  (a)..............  At least quarterly,
                                                    the national bank or
                                                    Federal savings
                                                    association must
                                                    calculate and
                                                    publicly disclose
                                                    the capital
                                                    conservation buffer
                                                    as described under
                                                   Sec. 3.11.
                                (b)..............  At least quarterly,
                                                    the national bank or
                                                    Federal savings
                                                    association must
                                                    calculate and
                                                    publicly disclose
                                                    the eligible
                                                    retained income of
                                                    the national bank or
                                                    Federal savings
                                                    association, as
                                                    described under Sec.
                                                     3.11.
                                (c)..............  At least quarterly,
                                                    the national bank or
                                                    Federal savings
                                                    association must
                                                    calculate and
                                                    publicly disclose
                                                    any limitations it
                                                    has on distributions
                                                    and discretionary
                                                    bonus payments
                                                    resulting from the
                                                    capital conservation
                                                    buffer framework
                                                    described under Sec.
                                                     3.11, including the
                                                    maximum payout
                                                    amount for the
                                                    quarter.
------------------------------------------------------------------------

    (c) General qualitative disclosure requirement. For each separate 
risk area described in Tables 5 through 10, the national bank or Federal 
savings association 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 5 toSec. 3.63 \1\--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 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 national bank or
                                                    Federal savings
                                                    association uses to
                                                    estimate its
                                                    allowance for loan
                                                    and lease losses,
                                                    including
                                                    statistical methods
                                                    used where
                                                    applicable;
                                                   (6) Policy for
                                                    charging-off
                                                    uncollectible
                                                    amounts; and
                                                   (7) Discussion of the
                                                    national bank's or
                                                    Federal savings
                                                    association'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, national
                                                    banks or Federal
                                                    savings associations
                                                    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.\2\
                                (c)..............  Geographic
                                                    distribution of
                                                    exposures,
                                                    categorized in
                                                    significant areas by
                                                    major types of
                                                    credit exposure.\3\
                                (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; \4\
                                                   (5) The balance in
                                                    the allowance for
                                                    loan and lease
                                                    losses at the end of
                                                    each period,
                                                    disaggregated on the
                                                    basis of the
                                                    national bank's or
                                                    Federal savings
                                                    association'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.

[[Page 98]]

 
                                (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,\5\ further
                                                    categorized as
                                                    required by GAAP.
                                (g)..............  Reconciliation of
                                                    changes in ALLL.\6\
                                (h)..............  Remaining contractual
                                                    maturity delineation
                                                    (for example, one
                                                    year or less) of the
                                                    whole portfolio,
                                                    categorized by
                                                    credit exposure.
------------------------------------------------------------------------
\1\ Table 5 does not cover equity exposures, which should be reported in
  Table 9.
\2\ See, for example, ASC Topic 815-10 and 210, as they may be amended
  from time to time.
\3\ Geographical areas may consist of individual countries, groups of
  countries, or regions within countries. A national bank or Federal
  savings association might choose to define the geographical areas
  based on the way the national bank's or Federal savings association's
  portfolio is geographically managed. The criteria used to allocate the
  loans to geographical areas must be specified.
\4\ A national bank or Federal savings association is encouraged also to
  provide an analysis of the aging of past-due loans.
\5\ The portion of the general allowance that is not allocated to a
  geographical area should be disclosed separately.
\6\ 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 6 toSec. 3.63--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 national bank or
                                                    Federal savings
                                                    association would
                                                    have to provide
                                                    given a
                                                    deterioration in the
                                                    national bank's or
                                                    Federal savings
                                                    association'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.\1\ A
                                                    national bank or
                                                    Federal savings
                                                    association 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.\2\
                                (c)..............  Notional amount of
                                                    purchased and sold
                                                    credit derivatives,
                                                    segregated between
                                                    use for the national
                                                    bank's or Federal
                                                    savings
                                                    association'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.
------------------------------------------------------------------------
\1\ 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.
\2\ 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 7 toSec. 3.63--Credit Risk Mitigation \1 2\
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 national bank or
                                                    Federal savings
                                                    association;
                                                   (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.
------------------------------------------------------------------------
\1\ At a minimum, a national bank or Federal savings association must
  provide the disclosures in Table 7 in relation to credit risk
  mitigation that has been recognized for the purposes of reducing
  capital requirements under this subpart. Where relevant, national
  banks or Federal savings associations are encouraged to give further
  information about mitigants that have not been recognized for that
  purpose.
\2\ 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 8).


[[Page 99]]


                  Table 8 toSec. 3.63--Securitization
Qualitative Disclosures.......  (a)..............  The general
                                                    qualitative
                                                    disclosure
                                                    requirement with
                                                    respect to a
                                                    securitization
                                                    (including synthetic
                                                    securitizations),
                                                    including a
                                                    discussion of:
                                                   (1) The national
                                                    bank's or Federal
                                                    savings
                                                    association's
                                                    objectives for
                                                    securitizing assets,
                                                    including the extent
                                                    to which these
                                                    activities transfer
                                                    credit risk of the
                                                    underlying exposures
                                                    away from the
                                                    national bank or
                                                    Federal savings
                                                    association to other
                                                    entities and
                                                    including the type
                                                    of risks assumed and
                                                    retained with
                                                    resecuritization
                                                    activity; \1\
                                                   (2) The nature of the
                                                    risks (e.g.
                                                    liquidity risk)
                                                    inherent in the
                                                    securitized assets;
                                                   (3) The roles played
                                                    by the national bank
                                                    or Federal savings
                                                    association in the
                                                    securitization
                                                    process \2\ and an
                                                    indication of the
                                                    extent of the
                                                    national bank's or
                                                    Federal savings
                                                    association'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 national
                                                    bank's or Federal
                                                    savings
                                                    association's policy
                                                    for mitigating the
                                                    credit risk retained
                                                    through
                                                    securitization and
                                                    resecuritization
                                                    exposures; and
                                                   (6) The risk-based
                                                    capital approaches
                                                    that the national
                                                    bank or Federal
                                                    savings association
                                                    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 national
                                                    bank or Federal
                                                    savings association,
                                                    as sponsor, uses to
                                                    securitize third-
                                                    party exposures. The
                                                    national bank or
                                                    Federal savings
                                                    association must
                                                    indicate whether it
                                                    has exposure to
                                                    these SPEs, either
                                                    on- or off-balance
                                                    sheet; and
                                                   (2) Affiliated
                                                    entities:
                                                   (i) That the national
                                                    bank or Federal
                                                    savings association
                                                    manages or advises;
                                                    and
                                                   (ii) That invest
                                                    either in the
                                                    securitization
                                                    exposures that the
                                                    national bank or
                                                    Federal savings
                                                    association has
                                                    securitized or in
                                                    securitization SPEs
                                                    that the national
                                                    bank or Federal
                                                    savings association
                                                    sponsors.\3\
                                (c)..............  Summary of the
                                                    national bank's or
                                                    Federal savings
                                                    association'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;
                                                   (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 of
                                                    this part; and
                                                   (7) Policies for
                                                    recognizing
                                                    liabilities on the
                                                    balance sheet for
                                                    arrangements that
                                                    could require the
                                                    national bank or
                                                    Federal savings
                                                    association 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
                                                    national bank or
                                                    Federal savings
                                                    association in
                                                    securitizations that
                                                    meet the operational
                                                    criteria provided in
                                                   Sec. 3.41
                                                    (categorized into
                                                    traditional and
                                                    synthetic
                                                    securitizations), by
                                                    exposure type,
                                                    separately for
                                                    securitizations of
                                                    third-party
                                                    exposures for which
                                                    the bank acts only
                                                    as sponsor.\4\
                                (f)..............  For exposures
                                                    securitized by the
                                                    national bank or
                                                    Federal savings
                                                    association in
                                                    securitizations that
                                                    meet the operational
                                                    criteria in Sec.
                                                    3.41:
                                                   (1) Amount of
                                                    securitized assets
                                                    that are impaired/
                                                    past due categorized
                                                    by exposure type;
                                                    \5\ and
                                                   (2) Losses recognized
                                                    by the national bank
                                                    or Federal savings
                                                    association during
                                                    the current period
                                                    categorized by
                                                    exposure type.\6\
                                (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.

[[Page 100]]

 
                                (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, CEIOs
                                                    deducted from total
                                                    capital (as
                                                    described in Sec.
                                                    3.42(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
                                                    creditworthiness
                                                    categories or
                                                    guarantor name.
------------------------------------------------------------------------
\1\ The national bank or Federal savings association 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 national bank or Federal
  savings association is active.
\2\ For example, these roles may include originator, investor, servicer,
  provider of credit enhancement, sponsor, liquidity provider, or swap
  provider.
\3\ Such affiliated entities may include, for example, money market
  funds, to be listed individually, and personal and private trusts, to
  be noted collectively.
\4\ ``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 this
  part.
\5\ Include credit-related other than temporary impairment (OTTI).
\6\ For example, charge-offs/allowances (if the assets remain on the
  bank's balance sheet) or credit-related OTTI of interest-only 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 9 toSec. 3.63--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).\1\
                                                   (2) Total latent
                                                    revaluation gains
                                                    (losses).\2\
                                                   (3) Any amounts of
                                                    the above included
                                                    in tier 1 or tier 2
                                                    capital.
                                (f)..............  Capital requirements
                                                    categorized by
                                                    appropriate equity
                                                    groupings,
                                                    consistent with the
                                                    national bank's or
                                                    Federal savings
                                                    association's
                                                    methodology, as well
                                                    as the aggregate
                                                    amounts and the type
                                                    of equity
                                                    investments subject
                                                    to any supervisory
                                                    transition regarding
                                                    regulatory capital
                                                    requirements.
------------------------------------------------------------------------
\1\ Unrealized gains (losses) recognized on the balance sheet but not
  through earnings.
\2\ Unrealized gains (losses) not recognized either on the balance sheet
  or through earnings.


[[Page 101]]


  Table 10 toSec. 3.63--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).
------------------------------------------------------------------------



Secs. 3.64-3.99  [Reserved]



   Subpart E_Risk-Weighted Assets_Internal Ratings-Based and Advanced 
                         Measurement Approaches

    Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted.



Sec. 3.100  Purpose, applicability, and principle of conservatism.

    (a) Purpose. This subpart E establishes:
    (1) Minimum qualifying criteria for national banks or Federal 
savings associations using institution-specific internal risk 
measurement and management processes for calculating risk-based capital 
requirements; and
    (2) Methodologies for such national banks or Federal savings 
associations to calculate their total risk-weighted assets.
    (b) Applicability. (1) This subpart applies to a national bank or 
Federal savings association that:
    (i) Has consolidated total assets, as reported on its most recent 
year-end Call Report equal to $250 billion or more;
    (ii) Has consolidated total on-balance sheet foreign exposure on its 
most recent year-end Call Report equal to $10 billion or more (where 
total on-balance sheet foreign exposure equals total cross-border claims 
less claims with a head office or guarantor located in another country 
plus redistributed guaranteed amounts to the country of head office or 
guarantor plus local country claims on local residents plus revaluation 
gains on foreign exchange and derivative products, calculated in 
accordance with the Federal Financial Institutions Examination Council 
(FFIEC) 009 Country Exposure Report);
    (iii) Is a subsidiary of a depository institution that uses the 
advanced approaches pursuant to subpart E of 12 CFR part 3 (OCC), 12 CFR 
part 217 (Board), or 12 CFR part 325 (FDIC) to calculate its total risk-
weighted assets;
    (iv) Is a subsidiary of a bank holding company or savings and loan 
holding company that uses the advanced approaches pursuant to 12 CFR 
part 217 to calculate its total risk-weighted assets; or
    (v) Elects to use this subpart to calculate its total risk-weighted 
assets.
    (2) A national bank or Federal savings association that is subject 
to this subpart shall remain subject to this subpart unless the OCC 
determines in writing that application of this subpart is not 
appropriate in light of the national bank's or Federal savings 
association's asset size, level of complexity, risk profile, or scope of 
operations. In making a determination under this paragraph (b), the OCC 
will apply notice and response procedures in the same manner and to the 
same extent as the notice and response procedures in 12 CFR 3.404.
    (3) A market risk national bank or Federal savings association 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 derivative positions, cleared 
transactions, and unsettled transactions).
    (c) Principle of conservatism. Notwithstanding the requirements of 
this subpart, a national bank or Federal savings association may choose 
not to

[[Page 102]]

apply a provision of this subpart to one or more exposures provided 
that:
    (1) The national bank or Federal savings association can demonstrate 
on an ongoing basis to the satisfaction of the OCC that not applying the 
provision would, in all circumstances, unambiguously generate a risk-
based capital requirement for each such exposure greater than that which 
would otherwise be required under this subpart;
    (2) The national bank or Federal savings association appropriately 
manages the risk of each such exposure;
    (3) The national bank or Federal savings association notifies the 
OCC in writing prior to applying this principle to each such exposure; 
and
    (4) The exposures to which the national bank or Federal savings 
association applies this principle are not, in the aggregate, material 
to the national bank or Federal savings association.

[78 FR 62157, 62273, 62274, Oct. 11, 2013]



Sec. 3.101  Definitions.

    (a) Terms that are set forth in Sec. 3.2 and used in this subpart 
have the definitions assigned thereto in Sec. 3.2.
    (b) For the purposes of this subpart, the following terms are 
defined as follows:
    Advanced internal ratings-based (IRB) systems means an advanced 
approaches national bank's or Federal savings association's internal 
risk rating and segmentation system; risk parameter quantification 
system; data management and maintenance system; and control, oversight, 
and validation system for credit risk of wholesale and retail exposures.
    Advanced systems means an advanced approaches national bank's or 
Federal savings association's advanced IRB systems, operational risk 
management processes, operational risk data and assessment systems, 
operational risk quantification systems, and, to the extent used by the 
national bank or Federal savings association, the internal models 
methodology, advanced CVA approach, double default excessive correlation 
detection process, and internal models approach (IMA) for equity 
exposures.
    Backtesting means the comparison of a national bank's or Federal 
savings association's internal estimates with actual outcomes during a 
sample period not used in model development. In this context, 
backtesting is one form of out-of-sample testing.
    Benchmarking means the comparison of a national bank's or Federal 
savings association's internal estimates with relevant internal and 
external data or with estimates based on other estimation techniques.
    Bond option contract means a bond option, bond future, or any other 
instrument linked to a bond that gives rise to similar counterparty 
credit risk.
    Business environment and internal control factors means the 
indicators of a national bank's or Federal savings association's 
operational risk profile that reflect a current and forward-looking 
assessment of the national bank's or Federal savings association's 
underlying business risk factors and internal control environment.
    Credit default swap (CDS) means a financial contract executed under 
standard industry documentation that allows one party (the protection 
purchaser) to transfer the credit risk of one or more exposures 
(reference exposure(s)) to another party (the protection provider) for a 
certain period of time.
    Credit valuation adjustment (CVA) means the fair value adjustment to 
reflect counterparty credit risk in valuation of OTC derivative 
contracts.
    Default--For the purposes of calculating capital requirements under 
this subpart:
    (1) Retail. (i) A retail exposure of a national bank or Federal 
savings association is in default if:
    (A) The exposure is 180 days past due, in the case of a residential 
mortgage exposure or revolving exposure;
    (B) The exposure is 120 days past due, in the case of retail 
exposures that are not residential mortgage exposures or revolving 
exposures; or
    (C) The national bank or Federal savings association has taken a 
full or partial charge-off, write-down of principal, or material 
negative fair value adjustment of principal on the exposure for credit-
related reasons.
    (ii) Notwithstanding paragraph (1)(i) of this definition, for a 
retail exposure

[[Page 103]]

held by a non-U.S. subsidiary of the national bank or Federal savings 
association that is subject to an internal ratings-based approach to 
capital adequacy consistent with the Basel Committee on Banking 
Supervision's ``International Convergence of Capital Measurement and 
Capital Standards: A Revised Framework'' in a non-U.S. jurisdiction, the 
national bank or Federal savings association may elect to use the 
definition of default that is used in that jurisdiction, provided that 
the national bank or Federal savings association has obtained prior 
approval from the OCC to use the definition of default in that 
jurisdiction.
    (iii) A retail exposure in default remains in default until the 
national bank or Federal savings association has reasonable assurance of 
repayment and performance for all contractual principal and interest 
payments on the exposure.
    (2) Wholesale. (i) A national bank's or Federal savings 
association's wholesale obligor is in default if:
    (A) The national bank or Federal savings association determines that 
the obligor is unlikely to pay its credit obligations to the national 
bank or Federal savings association in full, without recourse by the 
national bank or Federal savings association to actions such as 
realizing collateral (if held); or
    (B) The obligor is past due more than 90 days on any material credit 
obligation(s) to the national bank or Federal savings association.\25\
---------------------------------------------------------------------------

    \25\ Overdrafts are past due once the obligor has breached an 
advised limit or been advised of a limit smaller than the current 
outstanding balance.
---------------------------------------------------------------------------

    (ii) An obligor in default remains in default until the national 
bank or Federal savings association has reasonable assurance of 
repayment and performance for all contractual principal and interest 
payments on all exposures of the national bank or Federal savings 
association to the obligor (other than exposures that have been fully 
written-down or charged-off).
    Dependence means a measure of the association among operational 
losses across and within units of measure.
    Economic downturn conditions means, with respect to an exposure held 
by the national bank or Federal savings association, those conditions in 
which the aggregate default rates for that exposure's wholesale or 
retail exposure subcategory (or subdivision of such subcategory selected 
by the national bank or Federal savings association) in the exposure's 
national jurisdiction (or subdivision of such jurisdiction selected by 
the national bank or Federal savings association) are significantly 
higher than average.
    Effective maturity (M) of a wholesale exposure means:
    (1) For wholesale exposures other than repo-style transactions, 
eligible margin loans, and OTC derivative contracts described in 
paragraph (2) or (3) of this definition:
    (i) The weighted-average remaining maturity (measured in years, 
whole or fractional) of the expected contractual cash flows from the 
exposure, using the undiscounted amounts of the cash flows as weights; 
or
    (ii) The nominal remaining maturity (measured in years, whole or 
fractional) of the exposure.
    (2) For repo-style transactions, eligible margin loans, and OTC 
derivative contracts subject to a qualifying master netting agreement 
for which the national bank or Federal savings association does not 
apply the internal models approach in section 132(d), the weighted-
average remaining maturity (measured in years, whole or fractional) of 
the individual transactions subject to the qualifying master netting 
agreement, with the weight of each individual transaction set equal to 
the notional amount of the transaction.
    (3) For repo-style transactions, eligible margin loans, and OTC 
derivative contracts for which the national bank or Federal savings 
association applies the internal models approach in Sec. 3.132(d), the 
value determined in Sec. 3.132(d)(4).
    Eligible double default guarantor, with respect to a guarantee or 
credit derivative obtained by a national bank or Federal savings 
association, means:
    (1) U.S.-based entities. A depository institution, a bank holding 
company, a savings and loan holding company, or a securities broker or 
dealer registered

[[Page 104]]

with the SEC under the Securities Exchange Act, if at the time the 
guarantee is issued or anytime thereafter, has issued and outstanding an 
unsecured debt security without credit enhancement that is investment 
grade.
    (2) Non-U.S.-based entities. A foreign bank, or a non-U.S.-based 
securities firm if the national bank or Federal savings association 
demonstrates that the guarantor is subject to consolidated supervision 
and regulation comparable to that imposed on U.S. depository 
institutions, or securities broker-dealers) if at the time the guarantee 
is issued or anytime thereafter, has issued and outstanding an unsecured 
debt security without credit enhancement that is investment grade.
    Eligible operational risk offsets means amounts, not to exceed 
expected operational loss, that:
    (1) Are generated by internal business practices to absorb highly 
predictable and reasonably stable operational losses, including reserves 
calculated consistent with GAAP; and
    (2) Are available to cover expected operational losses with a high 
degree of certainty over a one-year horizon.
    Eligible purchased wholesale exposure means a purchased wholesale 
exposure that:
    (1) The national bank or Federal savings association or 
securitization SPE purchased from an unaffiliated seller and did not 
directly or indirectly originate;
    (2) Was generated on an arm's-length basis between the seller and 
the obligor (intercompany accounts receivable and receivables subject to 
contra-accounts between firms that buy and sell to each other do not 
satisfy this criterion);
    (3) Provides the national bank or Federal savings association or 
securitization SPE with a claim on all proceeds from the exposure or a 
pro rata interest in the proceeds from the exposure;
    (4) Has an M of less than one year; and
    (5) When consolidated by obligor, does not represent a concentrated 
exposure relative to the portfolio of purchased wholesale exposures.
    Expected exposure (EE) means the expected value of the probability 
distribution of non-negative credit risk exposures to a counterparty at 
any specified future date before the maturity date of the longest term 
transaction in the netting set. Any negative fair values in the 
probability distribution of fair values to a counterparty at a specified 
future date are set to zero to convert the probability distribution of 
fair values to the probability distribution of credit risk exposures.
    Expected operational loss (EOL) means the expected value of the 
distribution of potential aggregate operational losses, as generated by 
the national bank's or Federal savings association's operational risk 
quantification system using a one-year horizon.
    Expected positive exposure (EPE) means the weighted average over 
time of expected (non-negative) exposures to a counterparty where the 
weights are the proportion of the time interval that an individual 
expected exposure represents. When calculating risk-based capital 
requirements, the average is taken over a one-year horizon.
    Exposure at default (EAD) means:
    (1) For the on-balance sheet component of a wholesale exposure or 
segment of retail exposures (other than an OTC derivative contract, a 
repo-style transaction or eligible margin loan for which the national 
bank or Federal savings association determines EAD under Sec. 3.132, a 
cleared transaction, or default fund contribution), EAD means the 
national bank's or Federal savings association's carrying value 
(including net accrued but unpaid interest and fees) for the exposure or 
segment less any allocated transfer risk reserve for the exposure or 
segment.
    (2) For the off-balance sheet component of a wholesale exposure or 
segment of retail exposures (other than an OTC derivative contract, a 
repo-style transaction or eligible margin loan for which the national 
bank or Federal savings association determines EAD under Sec. 3.132, 
cleared transaction, or default fund contribution) in the form of a loan 
commitment, line of credit, trade-related letter of credit, or 
transaction-related contingency, EAD means the national bank's or 
Federal savings association's best estimate of net additions to the 
outstanding

[[Page 105]]

amount owed the national bank or Federal savings association, including 
estimated future additional draws of principal and accrued but unpaid 
interest and fees, that are likely to occur over a one-year horizon 
assuming the wholesale exposure or the retail exposures in the segment 
were to go into default. This estimate of net additions must reflect 
what would be expected during economic downturn conditions. For the 
purposes of this definition:
    (i) Trade-related letters of credit are short-term, self-liquidating 
instruments that are used to finance the movement of goods and are 
collateralized by the underlying goods.
    (ii) Transaction-related contingencies relate to a particular 
transaction and include, among other things, performance bonds and 
performance-based letters of credit.
    (3) For the off-balance sheet component of a wholesale exposure or 
segment of retail exposures (other than an OTC derivative contract, a 
repo-style transaction, or eligible margin loan for which the national 
bank or Federal savings association determines EAD under Sec. 3.132, 
cleared transaction, or default fund contribution) in the form of 
anything other than a loan commitment, line of credit, trade-related 
letter of credit, or transaction-related contingency, EAD means the 
notional amount of the exposure or segment.
    (4) EAD for OTC derivative contracts is calculated as described in 
Sec. 3.132. A national bank or Federal savings association also may 
determine EAD for repo-style transactions and eligible margin loans as 
described in Sec. 3.132.
    Exposure category means any of the wholesale, retail, 
securitization, or equity exposure categories.
    External operational loss event data means, with respect to a 
national bank or Federal savings association, gross operational loss 
amounts, dates, recoveries, and relevant causal information for 
operational loss events occurring at organizations other than the 
national bank or Federal savings association.
    IMM exposure means a repo-style transaction, eligible margin loan, 
or OTC derivative for which a national bank or Federal savings 
association calculates its EAD using the internal models methodology of 
Sec. 3.132(d).
    Internal operational loss event data means, with respect to a 
national bank or Federal savings association, gross operational loss 
amounts, dates, recoveries, and relevant causal information for 
operational loss events occurring at the national bank or Federal 
savings association.
    Loss given default (LGD) means:
    (1) For a wholesale exposure, the greatest of:
    (i) Zero;
    (ii) The national bank's or Federal savings association's 
empirically based best estimate of the long-run default-weighted average 
economic loss, per dollar of EAD, the national bank or Federal savings 
association would expect to incur if the obligor (or a typical obligor 
in the loss severity grade assigned by the national bank or Federal 
savings association to the exposure) were to default within a one-year 
horizon over a mix of economic conditions, including economic downturn 
conditions; or
    (iii) The national bank's or Federal savings association's 
empirically based best estimate of the economic loss, per dollar of EAD, 
the national bank or Federal savings association would expect to incur 
if the obligor (or a typical obligor in the loss severity grade assigned 
by the national bank or Federal savings association to the exposure) 
were to default within a one-year horizon during economic downturn 
conditions.
    (2) For a segment of retail exposures, the greatest of:
    (i) Zero;
    (ii) The national bank's or Federal savings association's 
empirically based best estimate of the long-run default-weighted average 
economic loss, per dollar of EAD, the national bank or Federal savings 
association would expect to incur if the exposures in the segment were 
to default within a one-year horizon over a mix of economic conditions, 
including economic downturn conditions; or
    (iii) The national bank's or Federal savings association's 
empirically based best estimate of the economic loss, per dollar of EAD, 
the national bank or Federal savings association would expect to incur 
if the exposures in the segment were to default within a one-

[[Page 106]]

year horizon during economic downturn conditions.
    (3) The economic loss on an exposure in the event of default is all 
material credit-related losses on the exposure (including accrued but 
unpaid interest or fees, losses on the sale of collateral, direct 
workout costs, and an appropriate allocation of indirect workout costs). 
Where positive or negative cash flows on a wholesale exposure to a 
defaulted obligor or a defaulted retail exposure (including proceeds 
from the sale of collateral, workout costs, additional extensions of 
credit to facilitate repayment of the exposure, and draw-downs of unused 
credit lines) occur after the date of default, the economic loss must 
reflect the net present value of cash flows as of the default date using 
a discount rate appropriate to the risk of the defaulted exposure.
    Obligor means the legal entity or natural person contractually 
obligated on a wholesale exposure, except that a national bank or 
Federal savings association may treat the following exposures as having 
separate obligors:
    (1) Exposures to the same legal entity or natural person denominated 
in different currencies;
    (2)(i) An income-producing real estate exposure for which all or 
substantially all of the repayment of the exposure is reliant on the 
cash flows of the real estate serving as collateral for the exposure; 
the national bank or Federal savings association, in economic substance, 
does not have recourse to the borrower beyond the real estate 
collateral; and no cross-default or cross-acceleration clauses are in 
place other than clauses obtained solely out of an abundance of caution; 
and
    (ii) Other credit exposures to the same legal entity or natural 
person; and
    (3)(i) A wholesale exposure authorized under section 364 of the U.S. 
Bankruptcy Code (11 U.S.C. 364) to a legal entity or natural person who 
is a debtor-in-possession for purposes of Chapter 11 of the Bankruptcy 
Code; and
    (ii) Other credit exposures to the same legal entity or natural 
person.
    Operational loss means a loss (excluding insurance or tax effects) 
resulting from an operational loss event. Operational loss includes all 
expenses associated with an operational loss event except for 
opportunity costs, forgone revenue, and costs related to risk management 
and control enhancements implemented to prevent future operational 
losses.
    Operational loss event means an event that results in loss and is 
associated with any of the following seven operational loss event type 
categories:
    (1) Internal fraud, which means the operational loss event type 
category that comprises operational losses resulting from an act 
involving at least one internal party of a type intended to defraud, 
misappropriate property, or circumvent regulations, the law, or company 
policy excluding diversity- and discrimination-type events.
    (2) External fraud, which means the operational loss event type 
category that comprises operational losses resulting from an act by a 
third party of a type intended to defraud, misappropriate property, or 
circumvent the law. Retail credit card losses arising from non-
contractual, third-party-initiated fraud (for example, identity theft) 
are external fraud operational losses. All other third-party-initiated 
credit losses are to be treated as credit risk losses.
    (3) Employment practices and workplace safety, which means the 
operational loss event type category that comprises operational losses 
resulting from an act inconsistent with employment, health, or safety 
laws or agreements, payment of personal injury claims, or payment 
arising from diversity- and discrimination-type events.
    (4) Clients, products, and business practices, which means the 
operational loss event type category that comprises operational losses 
resulting from the nature or design of a product or from an 
unintentional or negligent failure to meet a professional obligation to 
specific clients (including fiduciary and suitability requirements).
    (5) Damage to physical assets, which means the operational loss 
event type category that comprises operational losses resulting from the 
loss of or damage to physical assets from natural disaster or other 
events.
    (6) Business disruption and system failures, which means the 
operational

[[Page 107]]

loss event type category that comprises operational losses resulting 
from disruption of business or system failures.
    (7) Execution, delivery, and process management, which means the 
operational loss event type category that comprises operational losses 
resulting from failed transaction processing or process management or 
losses arising from relations with trade counterparties and vendors.
    Operational risk means the risk of loss resulting from inadequate or 
failed internal processes, people, and systems or from external events 
(including legal risk but excluding strategic and reputational risk).
    Operational risk exposure means the 99.9th percentile of the 
distribution of potential aggregate operational losses, as generated by 
the national bank's or Federal savings association's operational risk 
quantification system over a one-year horizon (and not incorporating 
eligible operational risk offsets or qualifying operational risk 
mitigants).
    Other retail exposure means an exposure (other than a securitization 
exposure, an equity exposure, a residential mortgage exposure, a pre-
sold construction loan, a qualifying revolving exposure, or the residual 
value portion of a lease exposure) that is managed as part of a segment 
of exposures with homogeneous risk characteristics, not on an 
individual-exposure basis, and is either:
    (1) An exposure to an individual for non-business purposes; or
    (2) An exposure to an individual or company for business purposes if 
the national bank's or Federal savings association's consolidated 
business credit exposure to the individual or company is $1 million or 
less.
    Probability of default (PD) means:
    (1) For a wholesale exposure to a non-defaulted obligor, the 
national bank's or Federal savings association's empirically based best 
estimate of the long-run average one-year default rate for the rating 
grade assigned by the national bank or Federal savings association to 
the obligor, capturing the average default experience for obligors in 
the rating grade over a mix of economic conditions (including economic 
downturn conditions) sufficient to provide a reasonable estimate of the 
average one-year default rate over the economic cycle for the rating 
grade.
    (2) For a segment of non-defaulted retail exposures, the national 
bank's or Federal savings association's empirically based best estimate 
of the long-run average one-year default rate for the exposures in the 
segment, capturing the average default experience for exposures in the 
segment over a mix of economic conditions (including economic downturn 
conditions) sufficient to provide a reasonable estimate of the average 
one-year default rate over the economic cycle for the segment.
    (3) For a wholesale exposure to a defaulted obligor or segment of 
defaulted retail exposures, 100 percent.
    Qualifying cross-product master netting agreement means a qualifying 
master netting agreement that provides for termination and close-out 
netting across multiple types of financial transactions or qualifying 
master netting agreements in the event of a counterparty's default, 
provided that the underlying financial transactions are OTC derivative 
contracts, eligible margin loans, or repo-style transactions. In order 
to treat an agreement as a qualifying cross-product master netting 
agreement for purposes of this subpart, a national bank or Federal 
savings association must comply with the requirements of Sec. 3.3(c) of 
this part with respect to that agreement.
    Qualifying revolving exposure (QRE) means an exposure (other than a 
securitization exposure or equity exposure) to an individual that is 
managed as part of a segment of exposures with homogeneous risk 
characteristics, not on an individual-exposure basis, and:
    (1) Is revolving (that is, the amount outstanding fluctuates, 
determined largely by a borrower's decision to borrow and repay up to a 
pre-established maximum amount, except for an outstanding amount that 
the borrower is required to pay in full every month);
    (2) Is unsecured and unconditionally cancelable by the national bank 
or Federal savings association to the fullest extent permitted by 
Federal law; and

[[Page 108]]

    (3)(i) Has a maximum contractual exposure amount (drawn plus 
undrawn) of up to $100,000; or
    (ii) With respect to a product with an outstanding amount that the 
borrower is required to pay in full every month, the total outstanding 
amount does not in practice exceed $100,000.
    (4) A segment of exposures that contains one or more exposures that 
fails to meet paragraph (3)(ii) of this definition must be treated as a 
segment of other retail exposures for the 24 month period following the 
month in which the total outstanding amount of one or more exposures 
individually exceeds $100,000.
    Retail exposure means a residential mortgage exposure, a qualifying 
revolving exposure, or an other retail exposure.
    Retail exposure subcategory means the residential mortgage exposure, 
qualifying revolving exposure, or other retail exposure subcategory.
    Risk parameter means a variable used in determining risk-based 
capital requirements for wholesale and retail exposures, specifically 
probability of default (PD), loss given default (LGD), exposure at 
default (EAD), or effective maturity (M).
    Scenario analysis means a systematic process of obtaining expert 
opinions from business managers and risk management experts to derive 
reasoned assessments of the likelihood and loss impact of plausible 
high-severity operational losses. Scenario analysis may include the 
well-reasoned evaluation and use of external operational loss event 
data, adjusted as appropriate to ensure relevance to a national bank's 
or Federal savings association's operational risk profile and control 
structure.
    Total wholesale and retail risk-weighted assets means the sum of:
    (1) Risk-weighted assets for wholesale exposures that are not IMM 
exposures, cleared transactions, or default fund contributions to non-
defaulted obligors and segments of non-defaulted retail exposures;
    (2) Risk-weighted assets for wholesale exposures to defaulted 
obligors and segments of defaulted retail exposures;
    (3) Risk-weighted assets for assets not defined by an exposure 
category;
    (4) Risk-weighted assets for non-material portfolios of exposures;
    (5) Risk-weighted assets for IMM exposures (as determined in 
Sec. 3.132(d));
    (6) Risk-weighted assets for cleared transactions and risk-weighted 
assets for default fund contributions (as determined in Sec. 3.133); and
    (7) Risk-weighted assets for unsettled transactions (as determined 
in Sec. 3.136).
    Unexpected operational loss (UOL) means the difference between the 
national bank's or Federal savings association's operational risk 
exposure and the national bank's or Federal savings association's 
expected operational loss.
    Unit of measure means the level (for example, organizational unit or 
operational loss event type) at which the national bank's or Federal 
savings association's operational risk quantification system generates a 
separate distribution of potential operational losses.
    Wholesale exposure means a credit exposure to a company, natural 
person, sovereign, or governmental entity (other than a securitization 
exposure, retail exposure, pre-sold construction loan, or equity 
exposure).
    Wholesale exposure subcategory means the HVCRE or non-HVCRE 
wholesale exposure subcategory.

                              Qualification



Sec. 3.121  Qualification process.

    (a) Timing. (1) A national bank or Federal savings association that 
is described in Sec. 3.100(b)(1)(i) through (iv) must adopt a written 
implementation plan no later than six months after the date the national 
bank or Federal savings association meets a criterion in that section. 
The implementation plan must incorporate an explicit start date no later 
than 36 months after the date the national bank or Federal savings 
association meets at least one criterion under Sec. 3.100(b)(1)(i) 
through (iv). The OCC may extend the start date.
    (2) A national bank or Federal savings association that elects to be 
subject to this appendix under Sec. 3.100(b)(1)(v) must adopt a written 
implementation plan.

[[Page 109]]

    (b) Implementation plan. (1) The national bank's or Federal savings 
association's implementation plan must address in detail how the 
national bank or Federal savings association complies, or plans to 
comply, with the qualification requirements in Sec. 3.122. The national 
bank or Federal savings association also must maintain a comprehensive 
and sound planning and governance process to oversee the implementation 
efforts described in the plan. At a minimum, the plan must:
    (i) Comprehensively address the qualification requirements in 
Sec. 3.122 for the national bank or Federal savings association and each 
consolidated subsidiary (U.S. and foreign-based) of the national bank or 
Federal savings association with respect to all portfolios and exposures 
of the national bank or Federal savings association and each of its 
consolidated subsidiaries;
    (ii) Justify and support any proposed temporary or permanent 
exclusion of business lines, portfolios, or exposures from the 
application of the advanced approaches in this subpart (which business 
lines, portfolios, and exposures must be, in the aggregate, immaterial 
to the national bank or Federal savings association);
    (iii) Include the national bank's or Federal savings association's 
self-assessment of:
    (A) The national bank's or Federal savings association's current 
status in meeting the qualification requirements in Sec. 3.122; and
    (B) The consistency of the national bank's or Federal savings 
association's current practices with the OCC's supervisory guidance on 
the qualification requirements;
    (iv) Based on the national bank's or Federal savings association's 
self-assessment, identify and describe the areas in which the national 
bank or Federal savings association proposes to undertake additional 
work to comply with the qualification requirements in Sec. 3.122 or to 
improve the consistency of the national bank's or Federal savings 
association's current practices with the OCC's supervisory guidance on 
the qualification requirements (gap analysis);
    (v) Describe what specific actions the national bank or Federal 
savings association will take to address the areas identified in the gap 
analysis required by paragraph (b)(1)(iv) of this section;
    (vi) Identify objective, measurable milestones, including delivery 
dates and a date when the national bank's or Federal savings 
association's implementation of the methodologies described in this 
subpart will be fully operational;
    (vii) Describe resources that have been budgeted and are available 
to implement the plan; and
    (viii) Receive approval of the national bank's or Federal savings 
association's board of directors.
    (2) The national bank or Federal savings association must submit the 
implementation plan, together with a copy of the minutes of the board of 
directors' approval, to the OCC at least 60 days before the national 
bank or Federal savings association proposes to begin its parallel run, 
unless the OCC waives prior notice.
    (c) Parallel run. Before determining its risk-weighted assets under 
this subpart and following adoption of the implementation plan, the 
national bank or Federal savings association must conduct a satisfactory 
parallel run. A satisfactory parallel run is a period of no less than 
four consecutive calendar quarters during which the national bank or 
Federal savings association complies with the qualification requirements 
in Sec. 3.122 to the satisfaction of the OCC. During the parallel run, 
the national bank or Federal savings association must report to the OCC 
on a calendar quarterly basis its risk-based capital ratios determined 
in accordance with Sec. 3.10(b)(1) through (3) and Sec. ???10.(c)(1) 
through (3). During this period, the national bank's or Federal savings 
association's minimum risk-based capital ratios are determined as set 
forth in subpart D of this part.
    (d) Approval to calculate risk-based capital requirements under this 
subpart. The OCC will notify the national bank or Federal savings 
association of the date that the national bank or Federal savings 
association must begin to use this subpart for purposes of Sec. 3.10 if 
the OCC determines that:
    (1) The national bank or Federal savings association fully complies 
with all

[[Page 110]]

the qualification requirements in Sec. 3.122;
    (2) The national bank or Federal savings association has conducted a 
satisfactory parallel run under paragraph (c) of this section; and
    (3) The national bank or Federal savings association has an adequate 
process to ensure ongoing compliance with the qualification requirements 
in Sec. 3.122.



Sec. 3.122  Qualification requirements.

    (a) Process and systems requirements. (1) A national bank or Federal 
savings association must have a rigorous process for assessing its 
overall capital adequacy in relation to its risk profile and a 
comprehensive strategy for maintaining an appropriate level of capital.
    (2) The systems and processes used by a national bank or Federal 
savings association for risk-based capital purposes under this subpart 
must be consistent with the national bank's or Federal savings 
association's internal risk management processes and management 
information reporting systems.
    (3) Each national bank or Federal savings association must have an 
appropriate infrastructure with risk measurement and management 
processes that meet the qualification requirements of this section and 
are appropriate given the national bank's or Federal savings 
association's size and level of complexity. Regardless of whether the 
systems and models that generate the risk parameters necessary for 
calculating a national bank's or Federal savings association's risk-
based capital requirements are located at any affiliate of the national 
bank or Federal savings association, the national bank or Federal 
savings association itself must ensure that the risk parameters and 
reference data used to determine its risk-based capital requirements are 
representative of its own credit risk and operational risk exposures.
    (b) Risk rating and segmentation systems for wholesale and retail 
exposures. (1) A national bank or Federal savings association must have 
an internal risk rating and segmentation system that accurately and 
reliably differentiates among degrees of credit risk for the national 
bank's or Federal savings association's wholesale and retail exposures.
    (2) For wholesale exposures:
    (i) A national bank or Federal savings association must have an 
internal risk rating system that accurately and reliably assigns each 
obligor to a single rating grade (reflecting the obligor's likelihood of 
default). A national bank or Federal savings association may elect, 
however, not to assign to a rating grade an obligor to whom the national 
bank or Federal savings association extends credit based solely on the 
financial strength of a guarantor, provided that all of the national 
bank's or Federal savings association's exposures to the obligor are 
fully covered by eligible guarantees, the national bank or Federal 
savings association applies the PD substitution approach in 
Sec. 3.134(c)(1) to all exposures to that obligor, and the national bank 
or Federal savings association immediately assigns the obligor to a 
rating grade if a guarantee can no longer be recognized under this part. 
The national bank's or Federal savings association's wholesale obligor 
rating system must have at least seven discrete rating grades for non-
defaulted obligors and at least one rating grade for defaulted obligors.
    (ii) Unless the national bank or Federal savings association has 
chosen to directly assign LGD estimates to each wholesale exposure, the 
national bank or Federal savings association must have an internal risk 
rating system that accurately and reliably assigns each wholesale 
exposure to a loss severity rating grade (reflecting the national bank's 
or Federal savings association's estimate of the LGD of the exposure). A 
national bank or Federal savings association employing loss severity 
rating grades must have a sufficiently granular loss severity grading 
system to avoid grouping together exposures with widely ranging LGDs.
    (3) For retail exposures, a national bank or Federal savings 
association must have an internal system that groups retail exposures 
into the appropriate retail exposure subcategory, groups the retail 
exposures in each retail exposure subcategory into separate segments 
with homogeneous risk characteristics, and assigns accurate and

[[Page 111]]

reliable PD and LGD estimates for each segment on a consistent basis. 
The national bank's or Federal savings association's system must 
identify and group in separate segments by subcategories exposures 
identified in Sec. 3.131(c)(2)(ii) and (iii).
    (4) The national bank's or Federal savings association's internal 
risk rating policy for wholesale exposures must describe the national 
bank's or Federal savings association's rating philosophy (that is, must 
describe how wholesale obligor rating assignments are affected by the 
national bank's or Federal savings association's choice of the range of 
economic, business, and industry conditions that are considered in the 
obligor rating process).
    (5) The national bank's or Federal savings association's internal 
risk rating system for wholesale exposures must provide for the review 
and update (as appropriate) of each obligor rating and (if applicable) 
each loss severity rating whenever the national bank or Federal savings 
association receives new material information, but no less frequently 
than annually. The national bank's or Federal savings association's 
retail exposure segmentation system must provide for the review and 
update (as appropriate) of assignments of retail exposures to segments 
whenever the national bank or Federal savings association receives new 
material information, but generally no less frequently than quarterly.
    (c) Quantification of risk parameters for wholesale and retail 
exposures. (1) The national bank or Federal savings association must 
have a comprehensive risk parameter quantification process that produces 
accurate, timely, and reliable estimates of the risk parameters for the 
national bank's or Federal savings association's wholesale and retail 
exposures.
    (2) Data used to estimate the risk parameters must be relevant to 
the national bank's or Federal savings association's actual wholesale 
and retail exposures, and of sufficient quality to support the 
determination of risk-based capital requirements for the exposures.
    (3) The national bank's or Federal savings association's risk 
parameter quantification process must produce appropriately conservative 
risk parameter estimates where the national bank or Federal savings 
association has limited relevant data, and any adjustments that are part 
of the quantification process must not result in a pattern of bias 
toward lower risk parameter estimates.
    (4) The national bank's or Federal savings association's risk 
parameter estimation process should not rely on the possibility of U.S. 
government financial assistance, except for the financial assistance 
that the U.S. government has a legally binding commitment to provide.
    (5) Where the national bank's or Federal savings association's 
quantifications of LGD directly or indirectly incorporate estimates of 
the effectiveness of its credit risk management practices in reducing 
its exposure to troubled obligors prior to default, the national bank or 
Federal savings association must support such estimates with empirical 
analysis showing that the estimates are consistent with its historical 
experience in dealing with such exposures during economic downturn 
conditions.
    (6) PD estimates for wholesale obligors and retail segments must be 
based on at least five years of default data. LGD estimates for 
wholesale exposures must be based on at least seven years of loss 
severity data, and LGD estimates for retail segments must be based on at 
least five years of loss severity data. EAD estimates for wholesale 
exposures must be based on at least seven years of exposure amount data, 
and EAD estimates for retail segments must be based on at least five 
years of exposure amount data.
    (7) Default, loss severity, and exposure amount data must include 
periods of economic downturn conditions, or the national bank or Federal 
savings association must adjust its estimates of risk parameters to 
compensate for the lack of data from periods of economic downturn 
conditions.
    (8) The national bank's or Federal savings association's PD, LGD, 
and EAD estimates must be based on the definition of default in 
Sec. 3.101.

[[Page 112]]

    (9) The national bank or Federal savings association must review and 
update (as appropriate) its risk parameters and its risk parameter 
quantification process at least annually.
    (10) The national bank or Federal savings association must, at least 
annually, conduct a comprehensive review and analysis of reference data 
to determine relevance of reference data to the national bank's or 
Federal savings association's exposures, quality of reference data to 
support PD, LGD, and EAD estimates, and consistency of reference data to 
the definition of default in Sec. 3.101.
    (d) Counterparty credit risk model. A national bank or Federal 
savings association must obtain the prior written approval of the OCC 
under Sec. 3.132 to use the internal models methodology for counterparty 
credit risk and the advanced CVA approach for the CVA capital 
requirement.
    (e) Double default treatment. A national bank or Federal savings 
association must obtain the prior written approval of the OCC under 
Sec. 3.135 to use the double default treatment.
    (f) Equity exposures model. A national bank or Federal savings 
association must obtain the prior written approval of the OCC under 
Sec. 3.153 to use the internal models approach for equity exposures.
    (g) Operational risk. (1) Operational risk management processes. A 
national bank or Federal savings association must:
    (i) Have an operational risk management function that:
    (A) Is independent of business line management; and
    (B) Is responsible for designing, implementing, and overseeing the 
national bank's or Federal savings association's operational risk data 
and assessment systems, operational risk quantification systems, and 
related processes;
    (ii) Have and document a process (which must capture business 
environment and internal control factors affecting the national bank's 
or Federal savings association's operational risk profile) to identify, 
measure, monitor, and control operational risk in the national bank's or 
Federal savings association's products, activities, processes, and 
systems; and
    (iii) Report operational risk exposures, operational loss events, 
and other relevant operational risk information to business unit 
management, senior management, and the board of directors (or a 
designated committee of the board).
    (2) Operational risk data and assessment systems. A national bank or 
Federal savings association must have operational risk data and 
assessment systems that capture operational risks to which the national 
bank or Federal savings association is exposed. The national bank's or 
Federal savings association's operational risk data and assessment 
systems must:
    (i) Be structured in a manner consistent with the national bank's or 
Federal savings association's current business activities, risk profile, 
technological processes, and risk management processes; and
    (ii) Include credible, transparent, systematic, and verifiable 
processes that incorporate the following elements on an ongoing basis:
    (A) Internal operational loss event data. The national bank or 
Federal savings association must have a systematic process for capturing 
and using internal operational loss event data in its operational risk 
data and assessment systems.
    (1) The national bank's or Federal savings association's operational 
risk data and assessment systems must include a historical observation 
period of at least five years for internal operational loss event data 
(or such shorter period approved by the OCC to address transitional 
situations, such as integrating a new business line).
    (2) The national bank or Federal savings association must be able to 
map its internal operational loss event data into the seven operational 
loss event type categories.
    (3) The national bank or Federal savings association may refrain 
from collecting internal operational loss event data for individual 
operational losses below established dollar threshold amounts if the 
national bank or Federal savings association can demonstrate to the 
satisfaction of the OCC that the thresholds are reasonable, do

[[Page 113]]

not exclude important internal operational loss event data, and permit 
the national bank or Federal savings association to capture 
substantially all the dollar value of the national bank's or Federal 
savings association's operational losses.
    (B) External operational loss event data. The national bank or 
Federal savings association must have a systematic process for 
determining its methodologies for incorporating external operational 
loss event data into its operational risk data and assessment systems.
    (C) Scenario analysis. The national bank or Federal savings 
association must have a systematic process for determining its 
methodologies for incorporating scenario analysis into its operational 
risk data and assessment systems.
    (D) Business environment and internal control factors. The national 
bank or Federal savings association must incorporate business 
environment and internal control factors into its operational risk data 
and assessment systems. The national bank or Federal savings association 
must also periodically compare the results of its prior business 
environment and internal control factor assessments against its actual 
operational losses incurred in the intervening period.
    (3) Operational risk quantification systems. (i) The national bank's 
or Federal savings association's operational risk quantification 
systems:
    (A) Must generate estimates of the national bank's or Federal 
savings association's operational risk exposure using its operational 
risk data and assessment systems;
    (B) Must employ a unit of measure that is appropriate for the 
national bank's or Federal savings association's range of business 
activities and the variety of operational loss events to which it is 
exposed, and that does not combine business activities or operational 
loss events with demonstrably different risk profiles within the same 
loss distribution;
    (C) Must include a credible, transparent, systematic, and verifiable 
approach for weighting each of the four elements, described in paragraph 
(g)(2)(ii) of this section, that a national bank or Federal savings 
association is required to incorporate into its operational risk data 
and assessment systems;
    (D) May use internal estimates of dependence among operational 
losses across and within units of measure if the national bank or 
Federal savings association can demonstrate to the satisfaction of the 
OCC that its process for estimating dependence is sound, robust to a 
variety of scenarios, and implemented with integrity, and allows for 
uncertainty surrounding the estimates. If the national bank or Federal 
savings association has not made such a demonstration, it must sum 
operational risk exposure estimates across units of measure to calculate 
its total operational risk exposure; and
    (E) Must be reviewed and updated (as appropriate) whenever the 
national bank or Federal savings association becomes aware of 
information that may have a material effect on the national bank's or 
Federal savings association's estimate of operational risk exposure, but 
the review and update must occur no less frequently than annually.
    (ii) With the prior written approval of the OCC, a national bank or 
Federal savings association may generate an estimate of its operational 
risk exposure using an alternative approach to that specified in 
paragraph (g)(3)(i) of this section. A national bank or Federal savings 
association proposing to use such an alternative operational risk 
quantification system must submit a proposal to the OCC. In determining 
whether to approve a national bank's or Federal savings association's 
proposal to use an alternative operational risk quantification system, 
the OCC will consider the following principles:
    (A) Use of the alternative operational risk quantification system 
will be allowed only on an exception basis, considering the size, 
complexity, and risk profile of the national bank or Federal savings 
association;
    (B) The national bank or Federal savings association must 
demonstrate that its estimate of its operational risk exposure generated 
under the alternative operational risk quantification system is 
appropriate and can be supported empirically; and

[[Page 114]]

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



Sec. 3.123  Ongoing qualification.

    (a) Changes to advanced systems. A national bank or Federal savings 
association must meet all the qualification requirements in Sec. 3.122 
on an ongoing basis. A national bank or Federal savings association must 
notify the OCC when the national bank or Federal savings association 
makes any change to an advanced system that would result in a material 
change in the national bank's or Federal savings association's advanced 
approaches total risk-weighted asset amount for an exposure type or when 
the national bank or Federal

[[Page 115]]

savings association makes any significant change to its modeling 
assumptions.
    (b) Failure to comply with qualification requirements. (1) If the 
OCC determines that a national bank or Federal savings association that 
uses this subpart and that has conducted a satisfactory parallel run 
fails to comply with the qualification requirements in Sec. 3.122, the 
OCC will notify the national bank or Federal savings association in 
writing of the national bank's or Federal savings association's failure 
to comply.
    (2) The national bank or Federal savings association must establish 
and submit a plan satisfactory to the OCC to return to compliance with 
the qualification requirements.
    (3) In addition, if the OCC determines that the national bank's or 
Federal savings association's advanced approaches total risk-weighted 
assets are not commensurate with the national bank's or Federal savings 
association's credit, market, operational, or other risks, the OCC may 
require such a national bank or Federal savings association to calculate 
its advanced approaches total risk-weighted assets with any 
modifications provided by the OCC.



Sec. 3.124  Merger and acquisition transitional arrangements.

    (a) Mergers and acquisitions of companies without advanced systems. 
If a national bank or Federal savings association merges with or 
acquires a company that does not calculate its risk-based capital 
requirements using advanced systems, the national bank or Federal 
savings association may use subpart D of this part to determine the 
risk-weighted asset amounts for the merged or acquired company's 
exposures for up to 24 months after the calendar quarter during which 
the merger or acquisition consummates. The OCC may extend this 
transition period for up to an additional 12 months. Within 90 days of 
consummating the merger or acquisition, the national bank or Federal 
savings association must submit to the OCC an implementation plan for 
using its advanced systems for the acquired company. During the period 
in which subpart D of this part applies to the merged or acquired 
company, any ALLL, net of allocated transfer risk reserves established 
pursuant to 12 U.S.C. 3904, associated with the merged or acquired 
company's exposures may be included in the acquiring national bank's or 
Federal savings association's tier 2 capital up to 1.25 percent of the 
acquired company's risk-weighted assets. All general allowances of the 
merged or acquired company must be excluded from the national bank's or 
Federal savings association's eligible credit reserves. In addition, the 
risk-weighted assets of the merged or acquired company are not included 
in the national bank's or Federal savings association's credit-risk-
weighted assets but are included in total risk-weighted assets. If a 
national bank or Federal savings association relies on this paragraph 
(a), the national bank or Federal savings association must disclose 
publicly the amounts of risk-weighted assets and qualifying capital 
calculated under this subpart for the acquiring national bank or Federal 
savings association and under subpart D of this part for the acquired 
company.
    (b) Mergers and acquisitions of companies with advanced systems. (1) 
If a national bank or Federal savings association merges with or 
acquires a company that calculates its risk-based capital requirements 
using advanced systems, the national bank or Federal savings association 
may use the acquired company's advanced systems to determine total risk-
weighted assets for the merged or acquired company's exposures for up to 
24 months after the calendar quarter during which the acquisition or 
merger consummates. The OCC may extend this transition period for up to 
an additional 12 months. Within 90 days of consummating the merger or 
acquisition, the national bank or Federal savings association must 
submit to the OCC an implementation plan for using its advanced systems 
for the merged or acquired company.
    (2) If the acquiring national bank or Federal savings association is 
not subject to the advanced approaches in this subpart at the time of 
acquisition or merger, during the period when subpart D of this part 
applies to the acquiring national bank or Federal savings association, 
the ALLL associated with the

[[Page 116]]

exposures of the merged or acquired company may not be directly included 
in tier 2 capital. Rather, any excess eligible credit reserves 
associated with the merged or acquired company's exposures may be 
included in the national bank's or Federal savings association's tier 2 
capital up to 0.6 percent of the credit-risk-weighted assets associated 
with those exposures.



Secs. 3.125-3.130  [Reserved]

              Risk-Weighted Assets for General Credit Risk



Sec. 3.131  Mechanics for calculating total wholesale and retail
risk-weighted assets.

    (a) Overview. A national bank or Federal savings association must 
calculate its total wholesale and retail risk-weighted asset amount in 
four distinct phases:
    (1) Phase 1--categorization of exposures;
    (2) Phase 2--assignment of wholesale obligors and exposures to 
rating grades and segmentation of retail exposures;
    (3) Phase 3--assignment of risk parameters to wholesale exposures 
and segments of retail exposures; and
    (4) Phase 4--calculation of risk-weighted asset amounts.
    (b) Phase 1--Categorization. The national bank or Federal savings 
association must determine which of its exposures are wholesale 
exposures, retail exposures, securitization exposures, or equity 
exposures. The national bank or Federal savings association must 
categorize each retail exposure as a residential mortgage exposure, a 
QRE, or an other retail exposure. The national bank or Federal savings 
association must identify which wholesale exposures are HVCRE exposures, 
sovereign exposures, OTC derivative contracts, repo-style transactions, 
eligible margin loans, eligible purchased wholesale exposures, cleared 
transactions, default fund contributions, unsettled transactions to 
which Sec. 3.136 applies, and eligible guarantees or eligible credit 
derivatives that are used as credit risk mitigants. The national bank or 
Federal savings association must identify any on-balance sheet asset 
that does not meet the definition of a wholesale, retail, equity, or 
securitization exposure, as well as any non-material portfolio of 
exposures described in paragraph (e)(4) of this section.
    (c) Phase 2--Assignment of wholesale obligors and exposures to 
rating grades and retail exposures to segments--(1) Assignment of 
wholesale obligors and exposures to rating grades.
    (i) The national bank or Federal savings association must assign 
each obligor of a wholesale exposure to a single obligor rating grade 
and must assign each wholesale exposure to which it does not directly 
assign an LGD estimate to a loss severity rating grade.
    (ii) The national bank or Federal savings association must identify 
which of its wholesale obligors are in default.
    (2) Segmentation of retail exposures. (i) The national bank or 
Federal savings association must group the retail exposures in each 
retail subcategory into segments that have homogeneous risk 
characteristics.
    (ii) The national bank or Federal savings association must identify 
which of its retail exposures are in default. The national bank or 
Federal savings association must segment defaulted retail exposures 
separately from non-defaulted retail exposures.
    (iii) If the national bank or Federal savings association determines 
the EAD for eligible margin loans using the approach in Sec. 3.132(b), 
the national bank or Federal savings association must identify which of 
its retail exposures are eligible margin loans for which the national 
bank or Federal savings association uses this EAD approach and must 
segment such eligible margin loans separately from other retail 
exposures.
    (3) Eligible purchased wholesale exposures. A national bank or 
Federal savings association may group its eligible purchased wholesale 
exposures into segments that have homogeneous risk characteristics. A 
national bank or Federal savings association must use the wholesale 
exposure formula in Table 1 of this section to determine the risk-based 
capital requirement for each segment of eligible purchased wholesale 
exposures.
    (d) Phase 3--Assignment of risk parameters to wholesale exposures 
and segments of retail exposures. (1) Quantification process. Subject to 
the limitations in

[[Page 117]]

this paragraph (d), the national bank or Federal savings association 
must:
    (i) Associate a PD with each wholesale obligor rating grade;
    (ii) Associate an LGD with each wholesale loss severity rating grade 
or assign an LGD to each wholesale exposure;
    (iii) Assign an EAD and M to each wholesale exposure; and
    (iv) Assign a PD, LGD, and EAD to each segment of retail exposures.
    (2) Floor on PD assignment. The PD for each wholesale obligor or 
retail segment may not be less than 0.03 percent, except for exposures 
to or directly and unconditionally guaranteed by a sovereign entity, the 
Bank for International Settlements, the International Monetary Fund, the 
European Commission, the European Central Bank, or a multilateral 
development bank, to which the national bank or Federal savings 
association assigns a rating grade associated with a PD of less than 
0.03 percent.
    (3) Floor on LGD estimation. The LGD for each segment of residential 
mortgage exposures may not be less than 10 percent, except for segments 
of residential mortgage exposures for which all or substantially all of 
the principal of each exposure is either:
    (i) Directly and unconditionally guaranteed by the full faith and 
credit of a sovereign entity; or
    (ii) Guaranteed by a contingent obligation of the U.S. government or 
its agencies, the enforceability of which is dependent upon some 
affirmative action on the part of the beneficiary of the guarantee or a 
third party (for example, meeting servicing requirements).
    (4) Eligible purchased wholesale exposures. A national bank or 
Federal savings association must assign a PD, LGD, EAD, and M to each 
segment of eligible purchased wholesale exposures. If the national bank 
or Federal savings association can estimate ECL (but not PD or LGD) for 
a segment of eligible purchased wholesale exposures, the national bank 
or Federal savings association must assume that the LGD of the segment 
equals 100 percent and that the PD of the segment equals ECL divided by 
EAD. The estimated ECL must be calculated for the exposures without 
regard to any assumption of recourse or guarantees from the seller or 
other parties.
    (5) Credit risk mitigation: credit derivatives, guarantees, and 
collateral. (i) A national bank or Federal savings association may take 
into account the risk reducing effects of eligible guarantees and 
eligible credit derivatives in support of a wholesale exposure by 
applying the PD substitution or LGD adjustment treatment to the exposure 
as provided in Sec. 3.134 or, if applicable, applying double default 
treatment to the exposure as provided in Sec. 3.135. A national bank or 
Federal savings association may decide separately for each wholesale 
exposure that qualifies for the double default treatment under 
Sec. 3.135 whether to apply the double default treatment or to use the 
PD substitution or LGD adjustment treatment without recognizing double 
default effects.
    (ii) A national bank or Federal savings association may take into 
account the risk reducing effects of guarantees and credit derivatives 
in support of retail exposures in a segment when quantifying the PD and 
LGD of the segment.
    (iii) Except as provided in paragraph (d)(6) of this section, a 
national bank or Federal savings association may take into account the 
risk reducing effects of collateral in support of a wholesale exposure 
when quantifying the LGD of the exposure, and may take into account the 
risk reducing effects of collateral in support of retail exposures when 
quantifying the PD and LGD of the segment.
    (6) EAD for OTC derivative contracts, repo-style transactions, and 
eligible margin loans. A national bank or Federal savings association 
must calculate its EAD for an OTC derivative contract as provided in 
Sec. 3.132 (c) and (d). A national bank or Federal savings association 
may take into account the risk-reducing effects of financial collateral 
in support of a repo-style transaction or eligible margin loan and of 
any collateral in support of a repo-style transaction that is included 
in the national bank's or Federal savings association's VaR-based 
measure under subpart F of this part through an adjustment to EAD as 
provided in Sec. 3.132(b) and (d). A

[[Page 118]]

national bank or Federal savings association that takes collateral into 
account through such an adjustment to EAD under Sec. 3.132 may not 
reflect such collateral in LGD.
    (7) Effective maturity. An exposure's M must be no greater than five 
years and no less than one year, except that an exposure's M must be no 
less than one day if the exposure is a trade related letter of credit, 
or if the exposure has an original maturity of less than one year and is 
not part of a national bank's or Federal savings association's ongoing 
financing of the obligor. An exposure is not part of a national bank's 
or Federal savings association's ongoing financing of the obligor if the 
national bank or Federal savings association:
    (i) Has a legal and practical ability not to renew or roll over the 
exposure in the event of credit deterioration of the obligor;
    (ii) Makes an independent credit decision at the inception of the 
exposure and at every renewal or roll over; and
    (iii) Has no substantial commercial incentive to continue its credit 
relationship with the obligor in the event of credit deterioration of 
the obligor.
    (8) EAD for exposures to certain central counterparties. A national 
bank or Federal savings association may attribute an EAD of zero 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.
    (e) Phase 4--Calculation of risk-weighted assets--(1) Non-defaulted 
exposures. (i) A national bank or Federal savings association must 
calculate the dollar risk-based capital requirement for each of its 
wholesale exposures to a non-defaulted obligor (except for eligible 
guarantees and eligible credit derivatives that hedge another wholesale 
exposure, IMM exposures, cleared transactions, default fund 
contributions, unsettled transactions, and exposures to which the 
national bank or Federal savings association applies the double default 
treatment in Sec. 3.135) and segments of non-defaulted retail exposures 
by inserting the assigned risk parameters for the wholesale obligor and 
exposure or retail segment into the appropriate risk-based capital 
formula specified in Table 1 and multiplying the output of the formula 
(K) by the EAD of the exposure or segment. Alternatively, a national 
bank or Federal savings association may apply a 300 percent risk weight 
to the EAD of an eligible margin loan if the national bank or Federal 
savings association is not able to meet the OCC's requirements for 
estimation of PD and LGD for the margin loan.

[[Page 119]]

[GRAPHIC] [TIFF OMITTED] TR11OC13.028


[[Page 120]]


[GRAPHIC] [TIFF OMITTED] TR11OC13.029

    (ii) The sum of all the dollar risk-based capital requirements for 
each wholesale exposure to a non-defaulted obligor and segment of non-
defaulted retail exposures calculated in paragraph (e)(1)(i) of this 
section and in Sec. 3.135(e) equals the total dollar risk-based capital 
requirement for those exposures and segments.
    (iii) The aggregate risk-weighted asset amount for wholesale 
exposures to non-defaulted obligors and segments of non-defaulted retail 
exposures equals the total dollar risk-based capital requirement in 
paragraph (e)(1)(ii) of this section multiplied by 12.5.
    (2) Wholesale exposures to defaulted obligors and segments of 
defaulted retail exposures--(i) Not covered by an eligible U.S. 
government guarantee: The dollar risk-based capital requirement for each 
wholesale exposure not covered by an eligible guarantee from the U.S. 
government to a defaulted obligor and each segment of defaulted retail 
exposures not covered by an eligible guarantee from the U.S. government 
equals 0.08 multiplied by the EAD of the exposure or segment.
    (ii) Covered by an eligible U.S. government guarantee: The dollar 
risk-based capital requirement for each wholesale exposure to a 
defaulted obligor covered by an eligible guarantee from the U.S. 
government and each segment of defaulted retail exposures covered by an 
eligible guarantee from the U.S. government equals the sum of:

[[Page 121]]

    (A) The sum of the EAD of the portion of each wholesale exposure to 
a defaulted obligor covered by an eligible guarantee from the U.S. 
government plus the EAD of the portion of each segment of defaulted 
retail exposures that is covered by an eligible guarantee from the U.S. 
government and the resulting sum is multiplied by 0.016, and
    (B) The sum of the EAD of the portion of each wholesale exposure to 
a defaulted obligor not covered by an eligible guarantee from the U.S. 
government plus the EAD of the portion of each segment of defaulted 
retail exposures that is not covered by an eligible guarantee from the 
U.S. government and the resulting sum is multiplied by 0.08.
    (iii) The sum of all the dollar risk-based capital requirements for 
each wholesale exposure to a defaulted obligor and each segment of 
defaulted retail exposures calculated in paragraph (e)(2)(i) of this 
section plus the dollar risk-based capital requirements each wholesale 
exposure to a defaulted obligor and for each segment of defaulted retail 
exposures calculated in paragraph (e)(2)(ii) of this section equals the 
total dollar risk-based capital requirement for those exposures and 
segments.
    (iv) The aggregate risk-weighted asset amount for wholesale 
exposures to defaulted obligors and segments of defaulted retail 
exposures equals the total dollar risk-based capital requirement 
calculated in paragraph (e)(2)(iii) of this section multiplied by 12.5.
    (3) Assets not included in a defined exposure category. (i) A 
national bank or Federal savings association may assign a risk-weighted 
asset amount of zero to cash owned and held in all offices of the 
national bank or Federal savings association or in transit and for gold 
bullion held in the national bank's or Federal savings association's own 
vaults, or held in another national bank's or Federal savings 
association's vaults on an allocated basis, to the extent the gold 
bullion assets are offset by gold bullion liabilities.
    (ii) A national bank or Federal savings association must assign a 
risk-weighted asset amount equal to 20 percent of the carrying value of 
cash items in the process of collection.
    (iii) A national bank or Federal savings association must assign a 
risk-weighted asset amount equal to 50 percent of the carrying value to 
a pre-sold construction loan unless the purchase contract is cancelled, 
in which case a national bank or Federal savings association must assign 
a risk-weighted asset amount equal to a 100 percent of the carrying 
value of the pre-sold construction loan.
    (iv) The risk-weighted asset amount for the residual value of a 
retail lease exposure equals such residual value.
    (v) The risk-weighted asset amount for DTAs arising from temporary 
differences that the national bank or Federal savings association could 
realize through net operating loss carrybacks equals the carrying value, 
netted in accordance with Sec. 3.22.
    (vi) The risk-weighted asset amount for MSAs, DTAs arising from 
temporary timing differences that the national bank or Federal savings 
association could not realize through net operating loss carrybacks, and 
significant investments in the capital of unconsolidated financial 
institutions in the form of common stock that are not deducted pursuant 
to Sec. 3.22(a)(7) equals the amount not subject to deduction multiplied 
by 250 percent.
    (vii) The risk-weighted asset amount for any other on-balance-sheet 
asset that does not meet the definition of a wholesale, retail, 
securitization, IMM, or equity exposure, cleared transaction, or default 
fund contribution and is not subject to deduction under Sec. 3.22(a), 
(c), or (d) equals the carrying value of the asset.
    (4) Non-material portfolios of exposures. The risk-weighted asset 
amount of a portfolio of exposures for which the national bank or 
Federal savings association has demonstrated to the OCC's satisfaction 
that the portfolio (when combined with all other portfolios of exposures 
that the national bank or Federal savings association seeks to treat 
under this paragraph (e)) is not material to the national bank or 
Federal savings association is the sum of the carrying values of on-
balance sheet exposures plus the notional amounts of off-balance sheet 
exposures in the portfolio. For purposes of this paragraph (e)(4), the 
notional amount of an OTC

[[Page 122]]

derivative contract that is not a credit derivative is the EAD of the 
derivative as calculated in Sec. 3.132.



Sec. 3.132  Counterparty credit risk of repo-style transactions, 
eligible margin loans, and OTC derivative contracts.

    (a) Methodologies for collateral recognition. (1) Instead of an LGD 
estimation methodology, a national bank or Federal savings association 
may use the following methodologies to recognize the benefits of 
financial collateral in mitigating the counterparty credit risk of repo-
style transactions, eligible margin loans, collateralized OTC derivative 
contracts and single product netting sets of such transactions, and to 
recognize the benefits of any collateral in mitigating the counterparty 
credit risk of repo-style transactions that are included in a national 
bank's or Federal savings association's VaR-based measure under subpart 
F of this part:
    (i) The collateral haircut approach set forth in paragraph (b)(2) of 
this section;
    (ii) The internal models methodology set forth in paragraph (d) of 
this section; and
    (iii) For single product netting sets of repo-style transactions and 
eligible margin loans, the simple VaR methodology set forth in paragraph 
(b)(3) of this section.
    (2) A national bank or Federal savings association may use any 
combination of the three methodologies for collateral recognition; 
however, it must use the same methodology for transactions in the same 
category.
    (3) A national bank or Federal savings association must use the 
methodology in paragraph (c) of this section, or with prior written 
approval of the OCC, the internal model methodology in paragraph (d) of 
this section, to calculate EAD for an OTC derivative contract or a set 
of OTC derivative contracts subject to a qualifying master netting 
agreement. To estimate EAD for qualifying cross-product master netting 
agreements, a national bank or Federal savings association may only use 
the internal models methodology in paragraph (d) of this section.
    (4) A national bank or Federal savings association must also use the 
methodology in paragraph (e) of this section to calculate the risk-
weighted asset amounts for CVA for OTC derivatives.
    (b) EAD for eligible margin loans and repo-style transactions--(1) 
General. A national bank or Federal savings association may recognize 
the credit risk mitigation benefits of financial collateral that secures 
an eligible margin loan, repo-style transaction, or single-product 
netting set of such transactions by factoring the collateral into its 
LGD estimates for the exposure. Alternatively, a national bank or 
Federal savings association may estimate an unsecured LGD for the 
exposure, as well as for any repo-style transaction that is included in 
the national bank's or Federal savings association's VaR-based measure 
under subpart F of this part, and determine the EAD of the exposure 
using:
    (i) The collateral haircut approach described in paragraph (b)(2) of 
this section;
    (ii) For netting sets only, the simple VaR methodology described in 
paragraph (b)(3) of this section; or
    (iii) The internal models methodology described in paragraph (d) of 
this section.
    (2) Collateral haircut approach--(i) EAD equation. A national bank 
or Federal savings association may determine EAD for an eligible margin 
loan, repo-style transaction, or netting set by setting EAD equal to max

{0, [([Sigma]E - [Sigma]C) + [Sigma](Es x Hs) + 
[Sigma](Efx x Hfx)]{time} ,


where:
    (A) [Sigma]E equals the value of the exposure (the sum of the 
current fair values of all instruments, gold, and cash the national bank 
or Federal savings association has lent, sold subject to repurchase, or 
posted as collateral to the counterparty under the transaction (or 
netting set));
    (B) [Sigma]C equals the value of the collateral (the sum of the 
current fair values of all instruments, gold, and cash the national bank 
or Federal savings association has borrowed, purchased subject to 
resale, or taken as collateral from the counterparty under the 
transaction (or netting set));

[[Page 123]]

    (C) Es equals the absolute value of the net position in a 
given instrument or in gold (where the net position in a given 
instrument or in gold equals the sum of the current fair values of the 
instrument or gold the national bank or Federal savings association has 
lent, sold subject to repurchase, or posted as collateral to the 
counterparty minus the sum of the current fair values of that same 
instrument or gold the national bank or Federal savings association has 
borrowed, purchased subject to resale, or taken as collateral from the 
counterparty);
    (D) Hs equals the market price volatility haircut 
appropriate to the instrument or gold referenced in Es;
    (E) Efx equals the absolute value of the net position of 
instruments and cash in a currency that is different from the settlement 
currency (where the net position in a given currency equals the sum of 
the current fair values of any instruments or cash in the currency the 
national bank or Federal savings association has lent, sold subject to 
repurchase, or posted as collateral to the counterparty minus the sum of 
the current fair values of any instruments or cash in the currency the 
national bank or Federal savings association has borrowed, purchased 
subject to resale, or taken as collateral from the counterparty); and
    (F) Hfx equals the haircut appropriate to the mismatch 
between the currency referenced in Efx and the settlement 
currency.
    (ii) Standard supervisory haircuts. (A) Under the standard 
supervisory haircuts approach:
    (1) A national bank or Federal savings association must use the 
haircuts for market price volatility (Hs) in Table 1 to 
Sec. 3.132, as adjusted in certain circumstances as provided in 
paragraphs (b)(2)(ii)(A)(3) and (4) of this section;

                                   Table 1 toSec. 3.132-- Standard Supervisory Market Price Volatility Haircuts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                               Haircut (in percent) assigned based on:
                                                           ------------------------------------------------------------------------------   Investment
                                                             Sovereign issuers risk weight under     Non-sovereign issuers risk weight         grade
                     Residual maturity                          this section \2\ (in percent)         under this section (in percent)     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          4.0            4.0
Greater than 1 year and less than or equal to 5 years.....          2.0          3.0         15.0          4.0          6.0          8.0           12.0
Greater than 5 years......................................          4.0          6.0         15.0          8.0         12.0         16.0           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. ROW RUL='s'
Cash collateral held...............................................................Zero..........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Other exposure types...............................................................25.0 .........
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircuts in Table 1 toSec. 3.132 are based on a 10 business-day holding period.
\2\ Includes a foreign PSE that receives a zero percent risk weight.

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

[[Page 124]]

five business days (for repo-style transactions) where the following 
conditions apply. If the number of trades in a netting set exceeds 5,000 
at any time during a quarter, a national bank or Federal savings 
association must adjust the supervisory haircuts upward on the basis of 
a holding period of twenty business days for the following quarter 
(except when a national bank or Federal savings association is 
calculating EAD for a cleared transaction under Sec. 3.133). If a 
netting set contains one or more trades involving illiquid collateral or 
an OTC derivative that cannot be easily replaced, a national bank or 
Federal savings association 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 that lasted more than the holding period, then the 
national bank or Federal savings association 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 national bank or Federal savings association must adjust the 
standard supervisory haircuts upward using the following formula:
[GRAPHIC] [TIFF OMITTED] TR11OC13.030

    (i) 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;
    (ii) Hs equals the standard supervisory haircut; and
    (iii) Ts equals 10 business days for eligible margin 
loans and derivative contracts or 5 business days for repo-style 
transactions.
    (5) If the instrument a national bank or Federal savings association 
has lent, sold subject to repurchase, or posted as collateral does not 
meet the definition of financial collateral, the national bank or 
Federal savings association must use a 25.0 percent haircut for market 
price volatility (Hs).
    (iii) Own internal estimates for haircuts. With the prior written 
approval of the OCC, a national bank or Federal savings association may 
calculate haircuts (Hs and Hfx) using its own 
internal estimates of the volatilities of market prices and foreign 
exchange rates.
    (A) To receive OCC approval to use its own internal estimates, a 
national bank or Federal savings association must satisfy the following 
minimum quantitative standards:
    (1) A national bank or Federal savings association must use a 99th 
percentile one-tailed confidence interval.
    (2) The minimum holding period for a repo-style transaction is five 
business days and for an eligible margin loan is ten business days 
except for transactions or netting sets for which paragraph 
(b)(2)(iii)(A)(3) of this section applies. When a national bank or 
Federal savings association 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] TR11OC13.031


[[Page 125]]


    (i) TM equals 5 for repo-style transactions and 10 for 
eligible margin loans;
    (ii) TN equals the holding period used by the national 
bank or Federal savings association to derive HN; and
    (iii) HN equals the haircut based on the holding period 
TN
    (3) If the number of trades in a netting set exceeds 5,000 at any 
time during a quarter, a national bank or Federal savings association 
must calculate the haircut using a minimum holding period of twenty 
business days for the following quarter (except when a national bank or 
Federal savings association is calculating EAD for a cleared transaction 
under Sec. 3.133). If a netting set contains one or more trades 
involving illiquid collateral or an OTC derivative that cannot be easily 
replaced, a national bank or Federal savings association 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 national bank or Federal savings association 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.
    (4) A national bank or Federal savings association 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.
    (5) A national bank or Federal savings association must have 
policies and procedures that describe how it determines the period of 
significant financial stress used to calculate the national bank's or 
Federal savings association's own internal estimates for haircuts under 
this section and must be able to provide empirical support for the 
period used. The national bank or Federal savings association must 
obtain the prior approval of the OCC for, and notify the OCC if the 
national bank or Federal savings association makes any material changes 
to, these policies and procedures.
    (6) Nothing in this section prevents the OCC from requiring a 
national bank or Federal savings association to use a different period 
of significant financial stress in the calculation of own internal 
estimates for haircuts.
    (7) A national bank or Federal savings association 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.
    (B) With respect to debt securities that are investment grade, a 
national bank or Federal savings association may calculate haircuts for 
categories of securities. For a category of securities, the national 
bank or Federal savings association 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 
national bank or Federal savings association has lent, sold subject to 
repurchase, posted as collateral, borrowed, purchased subject to resale, 
or taken as collateral. In determining relevant categories, the national 
bank or Federal savings association must at a minimum take into account:
    (1) The type of issuer of the security;
    (2) The credit quality of the security;
    (3) The maturity of the security; and
    (4) The interest rate sensitivity of the security.
    (C) With respect to debt securities that are not investment grade 
and equity securities, a national bank or Federal savings association 
must calculate a separate haircut for each individual security.
    (D) Where an exposure or collateral (whether in the form of cash or 
securities) is denominated in a currency that differs from the 
settlement currency, the national bank or Federal savings association 
must calculate a separate currency mismatch haircut for its net position 
in each mismatched currency based on estimated volatilities of foreign 
exchange rates between the mismatched currency and the settlement 
currency.
    (E) A national bank's or Federal savings association's own estimates 
of market price and foreign exchange rate volatilities may not take into 
account the correlations among securities and

[[Page 126]]

foreign exchange rates on either the exposure or collateral side of a 
transaction (or netting set) or the correlations among securities and 
foreign exchange rates between the exposure and collateral sides of the 
transaction (or netting set).
    (3) Simple VaR methodology. With the prior written approval of the 
OCC, a national bank or Federal savings association may estimate EAD for 
a netting set using a VaR model that meets the requirements in paragraph 
(b)(3)(iii) of this section. In such event, the national bank or Federal 
savings association must set EAD equal to max {0, [([Sigma]E - [Sigma]C) 
+ PFE]{time} , where:
    (i) [Sigma]E equals the value of the exposure (the sum of the 
current fair values of all instruments, gold, and cash the national bank 
or Federal savings association has lent, sold subject to repurchase, or 
posted as collateral to the counterparty under the netting set);
    (ii) [Sigma]C equals the value of the collateral (the sum of the 
current fair values of all instruments, gold, and cash the national bank 
or Federal savings association has borrowed, purchased subject to 
resale, or taken as collateral from the counterparty under the netting 
set); and
    (iii) PFE (potential future exposure) equals the national bank's or 
Federal savings association's empirically based best estimate of the 
99th percentile, one-tailed confidence interval for an increase in the 
value of ([Sigma]E - [Sigma]C) over a five-business-day holding period 
for repo-style transactions, or over a ten-business-day holding period 
for eligible margin loans except for netting sets for which paragraph 
(b)(3)(iv) of this section applies using a minimum one-year historical 
observation period of price data representing the instruments that the 
national bank or Federal savings association has lent, sold subject to 
repurchase, posted as collateral, borrowed, purchased subject to resale, 
or taken as collateral. The national bank or Federal savings association 
must validate its VaR model by establishing and maintaining a rigorous 
and regular backtesting regime.
    (iv) If the number of trades in a netting set exceeds 5,000 at any 
time during a quarter, a national bank or Federal savings association 
must use a twenty-business-day holding period for the following quarter 
(except when a national bank or Federal savings association is 
calculating EAD for a cleared transaction under Sec. 3.133). If a 
netting set contains one or more trades involving illiquid collateral, a 
national bank or Federal savings association must use a twenty-business-
day holding period. 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 national bank or Federal savings association 
must set its PFE for that netting set equal to an estimate over a 
holding period that is at least two times the minimum holding period for 
that netting set.
    (c) EAD for OTC derivative contracts--(1) OTC derivative contracts 
not subject to a qualifying master netting agreement. A national bank or 
Federal savings association must determine the EAD for an OTC derivative 
contract that is not subject to a qualifying master netting agreement 
using the current exposure methodology in paragraph (c)(5) of this 
section or using the internal models methodology described in paragraph 
(d) of this section.
    (2) OTC derivative contracts subject to a qualifying master netting 
agreement. A national bank or Federal savings association must determine 
the EAD for multiple OTC derivative contracts that are subject to a 
qualifying master netting agreement using the current exposure 
methodology in paragraph (c)(6) of this section or using the internal 
models methodology described in paragraph (d) of this section.
    (3) Credit derivatives. Notwithstanding paragraphs (c)(1) and (c)(2) 
of this section:
    (i) A national bank or Federal savings association that purchases a 
credit derivative that is recognized under Sec. 3.134 or Sec. 3.135 as a 
credit risk mitigant for an exposure that is not a covered position 
under subpart F of this part is not required to calculate a separate 
counterparty credit risk capital requirement under this section so long 
as the national bank or Federal savings association does so consistently 
for all such credit derivatives and either includes or excludes all such 
credit derivatives that are subject to a

[[Page 127]]

master netting agreement from any measure used to determine counterparty 
credit risk exposure to all relevant counterparties for risk-based 
capital purposes.
    (ii) A national bank or Federal savings association that is the 
protection provider in a credit derivative must treat the credit 
derivative as a wholesale exposure to the reference obligor and is not 
required to calculate a counterparty credit risk capital requirement for 
the credit derivative under this section, so long as it does so 
consistently for all such credit derivatives and either includes all or 
excludes all such credit derivatives that are subject to a master 
netting agreement from any measure used to determine counterparty credit 
risk exposure to all relevant counterparties for risk-based capital 
purposes (unless the national bank or Federal savings association is 
treating the credit derivative as a covered position under subpart F of 
this part, in which case the national bank or Federal savings 
association must calculate a supplemental counterparty credit risk 
capital requirement under this section).
    (4) Equity derivatives. A national bank or Federal savings 
association must treat an equity derivative contract as an equity 
exposure and compute a risk-weighted asset amount for the equity 
derivative contract under Secs. 3.151-3.155 (unless the national bank or 
Federal savings association is treating the contract as a covered 
position under subpart F of this part). In addition, if the national 
bank or Federal savings association is treating the contract as a 
covered position under subpart F of this part, and under certain other 
circumstances described in Sec. 3.155, the national bank or Federal 
savings association must also calculate a risk-based capital requirement 
for the counterparty credit risk of an equity derivative contract under 
this section.
    (5) Single OTC derivative contract. Except as modified by paragraph 
(c)(7) of this section, the EAD for a single OTC derivative contract 
that is not subject to a qualifying master netting agreement is equal to 
the sum of the national bank's or Federal savings association's current 
credit exposure and potential future credit exposure (PFE) on the 
derivative contract.
    (i) Current credit exposure. The current credit exposure for a 
single OTC derivative contract is the greater of the mark-to-fair value 
of the derivative contract or zero; and
    (ii) PFE. The PFE for a single OTC derivative contract, including an 
OTC derivative contract with a negative mark-to-fair value, is 
calculated by multiplying the notional principal amount of the 
derivative contract by the appropriate conversion factor in Table 2 to 
Sec. 3.132. For purposes of calculating either the PFE under paragraph 
(c)(5) of this section or the gross PFE under paragraph (c)(6) of this 
section for exchange rate contracts and other similar contracts in which 
the notional principal amount is equivalent to the cash flows, the 
notional principal amount is the net receipts to each party falling due 
on each value date in each currency. For any OTC derivative contract 
that does not fall within one of the specified categories in Table 2 to 
Sec. 3.132, the PFE must be calculated using the ``other'' conversion 
factors. A national bank or Federal savings association must use an OTC 
derivative contract's effective notional principal amount (that is, its 
apparent or stated notional principal amount multiplied by any 
multiplier in the OTC derivative contract) rather than its apparent or 
stated notional principal amount in calculating PFE. PFE of the 
protection provider of a credit derivative is capped at the net present 
value of the amount of unpaid premiums.

                                    Table 2 toSec. 3.132--Conversion Factor Matrix for OTC Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Credit     Credit (non-
                                                                             Foreign    (investment-   investment-                Precious
                   Remaining maturity \2\                       Interest     exchange       grade        grade        Equity       metals       Other
                                                                  rate       rate and     reference    reference                  (except
                                                                               gold      asset) \3\      asset)                    gold)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less............................................         0.00         0.01          0.05         0.10         0.06         0.07         0.10
Over one to five years......................................        0.005         0.05          0.05         0.10         0.08         0.07         0.12

[[Page 128]]

 
Over five years.............................................        0.015        0.075          0.05         0.10         0.10         0.08         0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For an OTC derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the
  derivative contract.
\2\ For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that
  the fair 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 national bank or Federal savings association 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 national bank or
  Federal savings association must use the column labeled ``Credit (non-investment-grade reference asset)'' for all other credit derivatives.

    (6) Multiple OTC derivative contracts subject to a qualifying master 
netting agreement. Except as modified by paragraph (c)(7) of this 
section, the EAD for multiple OTC derivative contracts subject to a 
qualifying master netting agreement is equal to the sum of the net 
current credit exposure and the adjusted sum of the PFE exposure for all 
OTC derivative contracts subject to the qualifying master netting 
agreement.
    (i) Net current credit exposure. The net current credit exposure is 
the greater of:
    (A) The net sum of all positive and negative fair values of the 
individual OTC derivative contracts subject to the qualifying master 
netting agreement; or
    (B) Zero; and
    (ii) Adjusted sum of the PFE. The adjusted sum of the PFE, 
Anet, is calculated as

Anet = (0.4 x Agross) + (0.6 x NGR x 
Agross),


where:
    (A) Agross = the gross PFE (that is, the sum of the PFE 
amounts (as determined under paragraph (c)(5)(ii) of this section) for 
each individual derivative contract subject to the qualifying master 
netting agreement); and
    (B) NGR = the net to gross ratio (that is, the ratio of the net 
current credit exposure to the gross current credit exposure). In 
calculating the NGR, the gross current credit exposure equals the sum of 
the positive current credit exposures (as determined under paragraph 
(c)(6)(i) of this section) of all individual derivative contracts 
subject to the qualifying master netting agreement.
    (7) Collateralized OTC derivative contracts. A national bank or 
Federal savings association may recognize the credit risk mitigation 
benefits of financial collateral that secures an OTC derivative contract 
or single-product netting set of OTC derivatives by factoring the 
collateral into its LGD estimates for the contract or netting set. 
Alternatively, a national bank or Federal savings association may 
recognize the credit risk mitigation benefits of financial collateral 
that secures such a contract or netting set that is marked-to-market on 
a daily basis and subject to a daily margin maintenance requirement by 
estimating an unsecured LGD for the contract or netting set and 
adjusting the EAD calculated under paragraph (c)(5) or (c)(6) of this 
section using the collateral haircut approach in paragraph (b)(2) of 
this section. The national bank or Federal savings association must 
substitute the EAD calculated under paragraph (c)(5) or (c)(6) of this 
section for [sum]E in the equation in paragraph (b)(2)(i) of this 
section and must use a ten-business day minimum holding period 
(TM = 10) unless a longer holding period is required by 
paragraph (b)(2)(iii)(A)(3) of this section.
    (8) Clearing member national bank's or Federal savings association's 
EAD. A clearing member national bank's or Federal savings association's 
EAD for an OTC derivative contract or netting set of OTC derivative 
contracts where the national bank or Federal savings association is 
either acting as a financial intermediary and enters into an

[[Page 129]]

offsetting transaction with a QCCP or where the national bank or Federal 
savings association provides a guarantee to the QCCP on the performance 
of the client equals the exposure amount calculated according to 
paragraph (c)(5) or (6) of this section multiplied by the scaling factor 
0.71. If the national bank or Federal savings association determines 
that a longer period is appropriate, it must use a larger scaling factor 
to adjust for a longer holding period as follows:
[GRAPHIC] [TIFF OMITTED] TR11OC13.032

where

H = the holding period greater than five days. Additionally, the OCC may 
          require the national bank or Federal savings association to 
          set a longer holding period if the OCC determines that a 
          longer period is appropriate due to the nature, structure, or 
          characteristics of the transaction or is commensurate with the 
          risks associated with the transaction.

    (d) Internal models methodology. (1)(i) With prior written approval 
from the OCC, a national bank or Federal savings association may use the 
internal models methodology in this paragraph (d) to determine EAD for 
counterparty credit risk for derivative contracts (collateralized or 
uncollateralized) and single-product netting sets thereof, for eligible 
margin loans and single-product netting sets thereof, and for repo-style 
transactions and single-product netting sets thereof.
    (ii) A national bank or Federal savings association that uses the 
internal models methodology for a particular transaction type 
(derivative contracts, eligible margin loans, or repo-style 
transactions) must use the internal models methodology for all 
transactions of that transaction type. A national bank or Federal 
savings association may choose to use the internal models methodology 
for one or two of these three types of exposures and not the other 
types.
    (iii) A national bank or Federal savings association may also use 
the internal models methodology for derivative contracts, eligible 
margin loans, and repo-style transactions subject to a qualifying cross-
product netting agreement if:
    (A) The national bank or Federal savings association effectively 
integrates the risk mitigating effects of cross-product netting into its 
risk management and other information technology systems; and
    (B) The national bank or Federal savings association obtains the 
prior written approval of the OCC.
    (iv) A national bank or Federal savings association that uses the 
internal models methodology for a transaction type must receive approval 
from the OCC to cease using the methodology for that transaction type or 
to make a material change to its internal model.
    (2) Risk-weighted assets using IMM. Under the IMM, a national bank 
or Federal savings association uses an internal model to estimate the 
expected exposure (EE) for a netting set and then calculates EAD based 
on that EE. A national bank or Federal savings association must 
calculate two EEs and two EADs (one stressed and one unstressed) for 
each netting set as follows:
    (i) EADunstressed is calculated using an EE estimate 
based on the most recent data meeting the requirements of paragraph 
(d)(3)(vii) of this section;
    (ii) EADstressed is calculated using an EE estimate based 
on a historical period that includes a period of stress to the credit 
default spreads of the national bank's or Federal savings association's 
counterparties according to paragraph (d)(3)(viii) of this section;
    (iii) The national bank or Federal savings association must use its 
internal model's probability distribution for changes in the fair value 
of a netting set that are attributable to changes in market variables to 
determine EE; and

[[Page 130]]

    (iv) Under the internal models methodology, EAD = Max (0, [alpha] x 
effective EPE - CVA), or, subject to the prior written approval of OCC 
as provided in paragraph (d)(10) of this section, a more conservative 
measure of EAD.
    (A) CVA equals the credit valuation adjustment that the national 
bank or Federal savings association has recognized in its balance sheet 
valuation of any OTC derivative contracts in the netting set. For 
purposes of this paragraph (d), CVA does not include any adjustments to 
common equity tier 1 capital attributable to changes in the fair value 
of the national bank's or Federal savings association's liabilities that 
are due to changes in its own credit risk since the inception of the 
transaction with the counterparty.
[GRAPHIC] [TIFF OMITTED] TR11OC13.033

    (C) [alpha] = 1.4 except as provided in paragraph (d)(5) of this 
section, or when the OCC has determined that the national bank or 
Federal savings association must set [alpha] higher based on the 
national bank's or Federal savings association's specific 
characteristics of counterparty credit risk or model performance.
    (v) A national bank or Federal savings association may include 
financial collateral currently posted by the counterparty as collateral 
(but may not include other forms of collateral) when calculating EE.
    (vi) If a national bank or Federal savings association hedges some 
or all of the counterparty credit risk associated with a netting set 
using an eligible credit derivative, the national bank or Federal 
savings association may take the reduction in exposure to the 
counterparty into account when estimating EE. If the national bank or 
Federal savings association recognizes this reduction in exposure to the 
counterparty in its estimate of EE, it must also use its internal model 
to estimate a separate EAD for the national bank's or Federal savings 
association's exposure to the protection provider of the credit 
derivative.
    (3) Prior approval relating to EAD calculation. To obtain OCC 
approval to calculate the distributions of exposures upon which the EAD 
calculation is based, the national bank or Federal savings association 
must demonstrate to the satisfaction of the OCC that it has been using 
for at least one year an internal model that broadly meets the following 
minimum standards, with which the national bank or Federal savings 
association must maintain compliance:
    (i) The model must have the systems capability to estimate the 
expected exposure to the counterparty on a daily basis (but is not 
expected to estimate or report expected exposure on a daily basis);

[[Page 131]]

    (ii) The model must estimate expected exposure at enough future 
dates to reflect accurately all the future cash flows of contracts in 
the netting set;
    (iii) The model must account for the possible non-normality of the 
exposure distribution, where appropriate;
    (iv) The national bank or Federal savings association must measure, 
monitor, and control current counterparty exposure and the exposure to 
the counterparty over the whole life of all contracts in the netting 
set;
    (v) The national bank or Federal savings association must be able to 
measure and manage current exposures gross and net of collateral held, 
where appropriate. The national bank or Federal savings association must 
estimate expected exposures for OTC derivative contracts both with and 
without the effect of collateral agreements;
    (vi) The national bank or Federal savings association must have 
procedures to identify, monitor, and control wrong-way risk throughout 
the life of an exposure. The procedures must include stress testing and 
scenario analysis;
    (vii) The model must use current market data to compute current 
exposures. The national bank or Federal savings association must 
estimate model parameters using historical data from the most recent 
three-year period and update the data quarterly or more frequently if 
market conditions warrant. The national bank or Federal savings 
association should consider using model parameters based on forward-
looking measures, where appropriate;
    (viii) When estimating model parameters based on a stress period, 
the national bank or Federal savings association must use at least three 
years of historical data that include a period of stress to the credit 
default spreads of the national bank's or Federal savings association's 
counterparties. The national bank or Federal savings association must 
review the data set and update the data as necessary, particularly for 
any material changes in its counterparties. The national bank or Federal 
savings association must demonstrate, at least quarterly, and maintain 
documentation of such demonstration, that the stress period coincides 
with increased CDS or other credit spreads of the national bank's or 
Federal savings association's counterparties. The national bank or 
Federal savings association must have procedures to evaluate the 
effectiveness of its stress calibration that include a process for using 
benchmark portfolios that are vulnerable to the same risk factors as the 
national bank's or Federal savings association's portfolio. The OCC may 
require the national bank or Federal savings association to modify its 
stress calibration to better reflect actual historic losses of the 
portfolio;
    (ix) A national bank or Federal savings association must subject its 
internal model to an initial validation and annual model review process. 
The model review should consider whether the inputs and risk factors, as 
well as the model outputs, are appropriate. As part of the model review 
process, the national bank or Federal savings association must have a 
backtesting program for its model that includes a process by which 
unacceptable model performance will be determined and remedied;
    (x) A national bank or Federal savings association must have 
policies for the measurement, management and control of collateral and 
margin amounts; and
    (xi) A national bank or Federal savings association must have a 
comprehensive stress testing program that captures all credit exposures 
to counterparties, and incorporates stress testing of principal market 
risk factors and creditworthiness of counterparties.
    (4) Calculating the maturity of exposures. (i) If the remaining 
maturity of the exposure or the longest-dated contract in the netting 
set is greater than one year, the national bank or Federal savings 
association must set M for the exposure or netting set equal to the 
lower of five years or M(EPE), where:

[[Page 132]]

[GRAPHIC] [TIFF OMITTED] TR11OC13.034

    (ii) If the remaining maturity of the exposure or the longest-dated 
contract in the netting set is one year or less, the national bank or 
Federal savings association must set M for the exposure or netting set 
equal to one year, except as provided in Sec. 3.131(d)(7).
    (iii) Alternatively, a national bank or Federal savings association 
that uses an internal model to calculate a one-sided credit valuation 
adjustment may use the effective credit duration estimated by the model 
as M(EPE) in place of the formula in paragraph (d)(4)(i) of this 
section.
    (5) Effects of collateral agreements on EAD. A national bank or 
Federal savings association may capture the effect on EAD of a 
collateral agreement that requires receipt of collateral when exposure 
to the counterparty increases, but may not capture the effect on EAD of 
a collateral agreement that requires receipt of collateral when 
counterparty credit quality deteriorates. Two methods are available to 
capture the effect of a collateral agreement, as set forth in paragraphs 
(d)(5)(i) and (ii) of this section:
    (i) With prior written approval from the OCC, a national bank or 
Federal savings association may include the effect of a collateral 
agreement within its internal model used to calculate EAD. The national 
bank or Federal savings association may set EAD equal to the expected 
exposure at the end of the margin period of risk. The margin period of 
risk means, with respect to a netting set subject to a collateral 
agreement, the time period from the most recent exchange of collateral 
with a counterparty until the next required exchange of collateral, plus 
the period of time required to sell and realize the proceeds of the 
least liquid collateral that can be delivered under the terms of the 
collateral agreement and, where applicable, the period of time required 
to re-hedge the resulting market risk upon the default of the 
counterparty. The minimum margin period of risk is set according to 
paragraph (d)(5)(iii) of this section; or
    (ii) As an alternative to paragraph (d)(5)(i) of this section, a 
national bank or Federal savings association that can model EPE without 
collateral agreements but cannot achieve the higher level of modeling 
sophistication to model EPE with collateral agreements can set effective 
EPE for a collateralized netting set equal to the lesser of:
    (A) An add-on that reflects the potential increase in exposure of 
the netting set over the margin period of risk, plus the larger of:
    (1) The current exposure of the netting set reflecting all 
collateral held or posted by the national bank or Federal savings 
association excluding any collateral called or in dispute; or
    (2) The largest net exposure including all collateral held or posted 
under the margin agreement that would not trigger a collateral call. For 
purposes of this section, the add-on is computed as the expected 
increase in the netting set's exposure over the margin period of risk 
(set in accordance with paragraph (d)(5)(iii) of this section); or
    (B) Effective EPE without a collateral agreement plus any collateral 
the

[[Page 133]]

national bank or Federal savings association posts to the counterparty 
that exceeds the required margin amount.
    (iii) For purposes of this part, including paragraphs (d)(5)(i) and 
(ii) of this section, the margin period of risk for a netting set 
subject to a collateral agreement is:
    (A) Five business days for repo-style transactions subject to daily 
remargining and daily marking-to-market, and ten business days for other 
transactions when liquid financial collateral is posted under a daily 
margin maintenance requirement, or
    (B) Twenty business days if the number of trades in a netting set 
exceeds 5,000 at any time during the previous quarter or contains one or 
more trades involving illiquid collateral or any derivative contract 
that cannot be easily replaced (except if the national bank or Federal 
savings association is calculating EAD for a cleared transaction under 
Sec. 3.133). If over the two previous quarters more than two margin 
disputes on a netting set have occurred that lasted more than the margin 
period of risk, then the national bank or Federal savings association 
must use a margin period of risk for that netting set that is at least 
two times the minimum margin period of risk for that netting set. If the 
periodicity of the receipt of collateral is N-days, the minimum margin 
period of risk is the minimum margin period of risk under this paragraph 
(d) plus N minus 1. This period should be extended to cover any 
impediments to prompt re-hedging of any market risk.
    (C) Five business days for an OTC derivative contract or netting set 
of OTC derivative contracts where the national bank or Federal savings 
association is either acting as a financial intermediary and enters into 
an offsetting transaction with a CCP or where the national bank or 
Federal savings association provides a guarantee to the CCP on the 
performance of the client. A national bank or Federal savings 
association must use a longer holding period if the national bank or 
Federal savings association determines that a longer period is 
appropriate. Additionally, the OCC may require the national bank or 
Federal savings association to set a longer holding period if the OCC 
determines that a longer period is appropriate due to the nature, 
structure, or characteristics of the transaction or is commensurate with 
the risks associated with the transaction.
    (6) Own estimate of alpha. With prior written approval of the OCC, a 
national bank or Federal savings association may calculate alpha as the 
ratio of economic capital from a full simulation of counterparty 
exposure across counterparties that incorporates a joint simulation of 
market and credit risk factors (numerator) and economic capital based on 
EPE (denominator), subject to a floor of 1.2. For purposes of this 
calculation, economic capital is the unexpected losses for all 
counterparty credit risks measured at a 99.9 percent confidence level 
over a one-year horizon. To receive approval, the national bank or 
Federal savings association must meet the following minimum standards to 
the satisfaction of the OCC:
    (i) The national bank's or Federal savings association's own 
estimate of alpha must capture in the numerator the effects of:
    (A) The material sources of stochastic dependency of distributions 
of fair values of transactions or portfolios of transactions across 
counterparties;
    (B) Volatilities and correlations of market risk factors used in the 
joint simulation, which must be related to the credit risk factor used 
in the simulation to reflect potential increases in volatility or 
correlation in an economic downturn, where appropriate; and
    (C) The granularity of exposures (that is, the effect of a 
concentration in the proportion of each counterparty's exposure that is 
driven by a particular risk factor).
    (ii) The national bank or Federal savings association must assess 
the potential model uncertainty in its estimates of alpha.
    (iii) The national bank or Federal savings association must 
calculate the numerator and denominator of alpha in a consistent fashion 
with respect to modeling methodology, parameter specifications, and 
portfolio composition.
    (iv) The national bank or Federal savings association must review 
and

[[Page 134]]

adjust as appropriate its estimates of the numerator and denominator of 
alpha on at least a quarterly basis and more frequently when the 
composition of the portfolio varies over time.
    (7) Risk-based capital requirements for transactions with specific 
wrong-way risk. A national bank or Federal savings association must 
determine if a repo-style transaction, eligible margin loan, bond 
option, or equity derivative contract or purchased credit derivative to 
which the national bank or Federal savings association applies the 
internal models methodology under this paragraph (d) has specific wrong-
way risk. If a transaction has specific wrong-way risk, the national 
bank or Federal savings association must treat the transaction as its 
own netting set and exclude it from the model described in 
Sec. 3.132(d)(2) and instead calculate the risk-based capital 
requirement for the transaction as follows:
    (i) For an equity derivative contract, by multiplying:
    (A) K, calculated using the appropriate risk-based capital formula 
specified in Table 1 of Sec. 3.131 using the PD of the counterparty and 
LGD equal to 100 percent, by
    (B) The maximum amount the national bank or Federal savings 
association could lose on the equity derivative.
    (ii) For a purchased credit derivative by multiplying:
    (A) K, calculated using the appropriate risk-based capital formula 
specified in Table 1 of Sec. 3.131 using the PD of the counterparty and 
LGD equal to 100 percent, by
    (B) The fair value of the reference asset of the credit derivative.
    (iii) For a bond option, by multiplying:
    (A) K, calculated using the appropriate risk-based capital formula 
specified in Table 1 of Sec. 3.131 using the PD of the counterparty and 
LGD equal to 100 percent, by
    (B) The smaller of the notional amount of the underlying reference 
asset and the maximum potential loss under the bond option contract.
    (iv) For a repo-style transaction or eligible margin loan by 
multiplying:
    (A) K, calculated using the appropriate risk-based capital formula 
specified in Table 1 of Sec. 3.131 using the PD of the counterparty and 
LGD equal to 100 percent, by
    (B) The EAD of the transaction determined according to the EAD 
equation in Sec. 3.131(b)(2), substituting the estimated value of the 
collateral assuming a default of the counterparty for the value of the 
collateral in [Sigma]c of the equation.
    (8) Risk-weighted asset amount for IMM exposures with specific 
wrong-way risk. The aggregate risk-weighted asset amount for IMM 
exposures with specific wrong-way risk is the sum of a national bank's 
or Federal savings association's risk-based capital requirement for 
purchased credit derivatives that are not bond options with specific 
wrong-way risk as calculated under paragraph (d)(7)(ii) of this section, 
a national bank's or Federal savings association's risk-based capital 
requirement for equity derivatives with specific wrong-way risk as 
calculated under paragraph (d)(7)(i) of this section, a national bank's 
or Federal savings association's risk-based capital requirement for bond 
options with specific wrong-way risk as calculated under paragraph 
(d)(7)(iii) of this section, and a national bank's or Federal savings 
association's risk-based capital requirement for repo-style transactions 
and eligible margin loans with specific wrong-way risk as calculated 
under paragraph (d)(7)(iv) of this section, multiplied by 12.5.
    (9) Risk-weighted assets for IMM exposures. (i) The national bank or 
Federal savings association must insert the assigned risk parameters for 
each counterparty and netting set into the appropriate formula specified 
in Table 1 of Sec. 3.131 and multiply the output of the formula by the 
EADunstressed of the netting set to obtain the unstressed 
capital requirement for each netting set. A national bank or Federal 
savings association that uses an advanced CVA approach that captures 
migrations in credit spreads under paragraph (e)(3) of this section must 
set the maturity adjustment (b) in the formula equal to zero. The sum of 
the unstressed capital requirement calculated for each netting set 
equals Kunstressed.

[[Page 135]]

    (ii) The national bank or Federal savings association must insert 
the assigned risk parameters for each wholesale obligor and netting set 
into the appropriate formula specified in Table 1 of Sec. 3.131 and 
multiply the output of the formula by the EADstressed of the 
netting set to obtain the stressed capital requirement for each netting 
set. A national bank or Federal savings association that uses an 
advanced CVA approach that captures migrations in credit spreads under 
paragraph (e)(3) of this section must set the maturity adjustment (b) in 
the formula equal to zero. The sum of the stressed capital requirement 
calculated for each netting set equals Kstressed.
    (iii) The national bank's or Federal savings association's dollar 
risk-based capital requirement under the internal models methodology 
equals the larger of Kunstressed and Kstressed. A 
national bank's or Federal savings association's risk-weighted assets 
amount for IMM exposures is equal to the capital requirement multiplied 
by 12.5, plus risk-weighted assets for IMM exposures with specific 
wrong-way risk in paragraph (d)(8) of this section and those in 
paragraph (d)(10) of this section.
    (10) Other measures of counterparty exposure. (i) With prior written 
approval of the OCC, a national bank or Federal savings association may 
set EAD equal to a measure of counterparty credit risk exposure, such as 
peak EAD, that is more conservative than an alpha of 1.4 (or higher 
under the terms of paragraph (d)(7)(iv)(C) of this section) times the 
larger of EPEunstressed and EPEstressed for every 
counterparty whose EAD will be measured under the alternative measure of 
counterparty exposure. The national bank or Federal savings association 
must demonstrate the conservatism of the measure of counterparty credit 
risk exposure used for EAD. With respect to paragraph (d)(10)(i) of this 
section:
    (A) For material portfolios of new OTC derivative products, the 
national bank or Federal savings association may assume that the current 
exposure methodology in paragraphs (c)(5) and (c)(6) of this section 
meets the conservatism requirement of this section for a period not to 
exceed 180 days.
    (B) For immaterial portfolios of OTC derivative contracts, the 
national bank or Federal savings association generally may assume that 
the current exposure methodology in paragraphs (c)(5) and (c)(6) of this 
section meets the conservatism requirement of this section.
    (ii) To calculate risk-weighted assets for purposes of the approach 
in paragraph (d)(10)(i) of this section, the national bank or Federal 
savings association must insert the assigned risk parameters for each 
counterparty and netting set into the appropriate formula specified in 
Table 1 of Sec. 3.131, multiply the output of the formula by the EAD for 
the exposure as specified above, and multiply by 12.5.
    (e) Credit valuation adjustment (CVA) risk-weighted assets--(1) In 
general. With respect to its OTC derivative contracts, a national bank 
or Federal savings association must calculate a CVA risk-weighted asset 
amount for its portfolio of OTC derivative transactions that are subject 
to the CVA capital requirement using the simple CVA approach described 
in paragraph (e)(5) of this section or, with prior written approval of 
the OCC, the advanced CVA approach described in paragraph (e)(6) of this 
section. A national bank or Federal savings association that receives 
prior OCC approval to calculate its CVA risk-weighted asset amounts for 
a class of counterparties using the advanced CVA approach must continue 
to use that approach for that class of counterparties until it notifies 
the OCC in writing that the national bank or Federal savings association 
expects to begin calculating its CVA risk-weighted asset amount using 
the simple CVA approach. Such notice must include an explanation of the 
national bank's or Federal savings association's rationale and the date 
upon which the national bank or Federal savings association will begin 
to calculate its CVA risk-weighted asset amount using the simple CVA 
approach.
    (2) Market risk national banks or Federal savings associations. 
Notwithstanding the prior approval requirement in paragraph (e)(1) of 
this section, a market risk national bank or Federal savings association 
may calculate its CVA risk-weighted asset amount using

[[Page 136]]

the advanced CVA approach if the national bank or Federal savings 
association has OCC approval to:
    (i) Determine EAD for OTC derivative contracts using the internal 
models methodology described in paragraph (d) of this section; and
    (ii) Determine its specific risk add-on for debt positions issued by 
the counterparty using a specific risk model described in Sec. 3.207(b).
    (3) Recognition of hedges. (i) A national bank or Federal savings 
association may recognize a single name CDS, single name contingent CDS, 
any other equivalent hedging instrument that references the counterparty 
directly, and index credit default swaps (CDSind) as a CVA 
hedge under paragraph (e)(5)(ii) of this section or paragraph (e)(6) of 
this section, provided that the position is managed as a CVA hedge in 
accordance with the national bank's or Federal savings association's 
hedging policies.
    (ii) A national bank or Federal savings association shall not 
recognize as a CVA hedge any tranched or nth-to-default 
credit derivative.
    (4) Total CVA risk-weighted assets. Total CVA risk-weighted assets 
is the CVA capital requirement, KCVA, calculated for a 
national bank's or Federal savings association's entire portfolio of OTC 
derivative counterparties that are subject to the CVA capital 
requirement, multiplied by 12.5.
    (5) Simple CVA approach. (i) Under the simple CVA approach, the CVA 
capital requirement, KCVA, is calculated according to the 
following formula:
[GRAPHIC] [TIFF OMITTED] TR11OC13.035

    (A) wi = the weight applicable to counterparty i under Table 3 to 
Sec. 3.132;
    (B) Mi = the EAD-weighted average of the effective maturity of each 
netting set with counterparty i (where each netting set's effective 
maturity can be no less than one year.)
    (C) EADitotal = the sum of the EAD for all netting sets of OTC 
derivative contracts with counterparty i calculated using the current 
exposure methodology described in paragraph (c) of this section or the 
internal models methodology described in paragraph (d) of this section. 
When the national bank or Federal savings association calculates EAD 
under paragraph (c) of this section, such EAD may be adjusted for 
purposes of calculating EADitotal by multiplying EAD by (1-exp(-0.05 x 
Mi))/(0.05 x Mi), where ``exp'' is the exponential function. When the 
national bank or Federal savings association calculates EAD under 
paragraph (d) of this section, EADitotal equals EADunstressed.
    (D) Mihedge = the notional weighted average maturity of the hedge 
instrument.
    (E) Bi = the sum of the notional amounts of any purchased single 
name CDS referencing counterparty i that is used to hedge CVA risk to 
counterparty i multiplied by (1-exp(-0.05 x Mihedge))/(0.05 x Mihedge).
    (F) Mind = the maturity of the CDSind or the 
notional weighted average maturity of any CDSind purchased to 
hedge CVA risk of counterparty i.
    (G) Bind = the notional amount of one or more CDSind 
purchased to hedge CVA risk for counterparty i multiplied by (1-exp(-
0.05 x Mind))/(0.05 x Mind)
    (H) wind = the weight applicable to the CDSind based on 
the average weight of the underlying reference names that comprise the 
index under Table 3 to Sec. 3.132.
    (ii) The national bank or Federal savings association may treat the 
notional amount of the index attributable to a

[[Page 137]]

counterparty as a single name hedge of counterparty i (Bi,) when 
calculating KCVA, and subtract the notional amount of Bi from 
the notional amount of the CDSind. A national bank or Federal 
savings association must treat the CDSind hedge with the 
notional amount reduced by Bi as a CVA hedge.

        Table 3 toSec. 3.132--Assignment of Counterparty Weight
------------------------------------------------------------------------
                                                           Weight wi (in
                Internal PD (in percent)                     percent)
------------------------------------------------------------------------
0.00-0.07...............................................            0.70
0.070-0.15...................................            0.80
0.15-0.40....................................            1.00
0.40-2.00....................................            2.00
2.00-6.00....................................            3.00
6.00.........................................           10.00
------------------------------------------------------------------------

    (6) Advanced CVA approach. (i) A national bank or Federal savings 
association may use the VaR model that it uses to determine specific 
risk under Sec. 3.207(b) or another VaR model that meets the 
quantitative requirements of Sec. 3.205(b) and Sec. 3.207(b)(1) to 
calculate its CVA capital requirement for a counterparty by modeling the 
impact of changes in the counterparties' credit spreads, together with 
any recognized CVA hedges, on the CVA for the counterparties, subject to 
the following requirements:
    (A) The VaR model must incorporate only changes in the 
counterparties' credit spreads, not changes in other risk factors. The 
VaR model does not need to capture jump-to-default risk;
    (B) A national bank or Federal savings association that qualifies to 
use the advanced CVA approach must include in that approach any 
immaterial OTC derivative portfolios for which it uses the current 
exposure methodology in paragraph (c) of this section according to 
paragraph (e)(6)(viii) of this section; and
    (C) A national bank or Federal savings association must have the 
systems capability to calculate the CVA capital requirement for a 
counterparty on a daily basis (but is not required to calculate the CVA 
capital requirement on a daily basis).
    (ii) Under the advanced CVA approach, the CVA capital requirement, 
KCVA, is calculated according to the following formulas:
[GRAPHIC] [TIFF OMITTED] TR11OC13.037


Where
    (A) ti = the time of the i-th revaluation time bucket starting from 
t0 = 0.
    (B) tT = the longest contractual maturity across the OTC derivative 
contracts with the counterparty.
    (C) si = the CDS spread for the counterparty at tenor ti used to 
calculate the CVA for the counterparty. If a CDS spread is not 
available, the national bank or Federal savings association must use a 
proxy spread based on the credit quality, industry and region of the 
counterparty.
    (D) LGDMKT = the loss given default of the counterparty based on the 
spread of a publicly traded debt instrument of the counterparty, or, 
where a publicly

[[Page 138]]

traded debt instrument spread is not available, a proxy spread based on 
the credit quality, industry, and region of the counterparty. Where no 
market information and no reliable proxy based on the credit quality, 
industry, and region of the counterparty are available to determine 
LGDMKT, a national bank or Federal savings association may 
use a conservative estimate when determining LGDMKT, subject 
to approval by the OCC.
    (E) EEi = the sum of the expected exposures for all netting sets 
with the counterparty at revaluation time ti, calculated according to 
paragraphs (e)(6)(iv)(A) and (e)(6)(v)(A) of this section.
    (F) Di = the risk-free discount factor at time ti, where D0 = 1.
    (G) Exp is the exponential function.
    (H) The subscript j refers either to a stressed or an unstressed 
calibration as described in paragraphs (e)(6)(iv) and (v) of this 
section.
    (iii) Notwithstanding paragraphs (e)(6)(i) and (e)(6)(ii) of this 
section, a national bank or Federal savings association must use the 
formulas in paragraphs (e)(6)(iii)(A) or (e)(6)(iii)(B) of this section 
to calculate credit spread sensitivities if its VaR model is not based 
on full repricing.
    (A) If the VaR model is based on credit spread sensitivities for 
specific tenors, the national bank or Federal savings association must 
calculate each credit spread sensitivity according to the following 
formula:
[GRAPHIC] [TIFF OMITTED] TR11OC13.039

    (iv) To calculate the CVAUnstressed measure for purposes 
of paragraph (e)(6)(ii) of this section, the national bank or Federal 
savings association must:
    (A) Use the EEi calculated using the calibration of 
paragraph (d)(3)(vii) of this section, except as provided in 
Sec. 3.132(e)(6)(vi), and
    (B) Use the historical observation period required under 
Sec. 3.205(b)(2).
    (v) To calculate the CVAStressed measure for purposes of 
paragraph (e)(6)(ii) of this section, the national bank or Federal 
savings association must:
    (A) Use the EEi calculated using the stress calibration 
in paragraph (d)(3)(viii) of this section except as provided in 
paragraph (e)(6)(vi) of this section.
    (B) Calibrate VaR model inputs to historical data from the most 
severe twelve-month stress period contained within the three-year stress 
period

[[Page 139]]

used to calculate EEi. The OCC may require a national bank or 
Federal savings association to use a different period of significant 
financial stress in the calculation of the CVAStressed 
measure.
    (vi) If a national bank or Federal savings association captures the 
effect of a collateral agreement on EAD using the method described in 
paragraph (d)(5)(ii) of this section, for purposes of paragraph 
(e)(6)(ii) of this section, the national bank or Federal savings 
association must calculate EEi using the method in paragraph 
(d)(5)(ii) of this section and keep that EE constant with the maturity 
equal to the maximum of:
    (A) Half of the longest maturity of a transaction in the netting 
set, and
    (B) The notional weighted average maturity of all transactions in 
the netting set.
    (vii) For purposes of paragraph (e)(6) of this section, the national 
bank's or Federal savings association's VaR model must capture the basis 
between the spreads of any CDSind that is used as the hedging 
instrument and the hedged counterparty exposure over various time 
periods, including benign and stressed environments. If the VaR model 
does not capture that basis, the national bank or Federal savings 
association must reflect only 50 percent of the notional amount of the 
CDSind hedge in the VaR model.
    (viii) If a national bank or Federal savings association uses the 
current exposure methodology described in paragraphs (c)(5) and (c)(6) 
of this section to calculate the EAD for any immaterial portfolios of 
OTC derivative contracts, the national bank or Federal savings 
association must use that EAD as a constant EE in the formula for the 
calculation of CVA with the maturity equal to the maximum of:
    (A) Half of the longest maturity of a transaction in the netting 
set, and
    (B) The notional weighted average maturity of all transactions in 
the netting set.



Sec. 3.133  Cleared transactions.

    (a) General requirements. (1) A national bank or Federal savings 
association 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 national bank or Federal savings association 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 national banks or Federal savings 
associations--(1) Risk-weighted assets for cleared transactions. (i) To 
determine the risk-weighted asset amount for a cleared transaction, a 
national bank or Federal savings association 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 national bank's or Federal savings 
association'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. (i) For a cleared transaction that is a 
derivative contract or a netting set of derivative contracts, trade 
exposure amount equals the EAD for the derivative contract or netting 
set of derivative contracts calculated using the methodology used to 
calculate EAD for OTC derivative contracts set forth in Sec. 3.132(c) or 
(d), plus the fair value of the collateral posted by the clearing member 
client national bank or Federal savings association and held by the CCP 
or a clearing member in a manner that is not bankruptcy remote. When the 
national bank or Federal savings association calculates EAD for the 
cleared transaction using the methodology in Sec. 3.132(d), EAD equals 
EADunstressed.
    (ii) For a cleared transaction that is a repo-style transaction or 
netting set of repo-style transactions, trade exposure amount equals the 
EAD for the repo-style transaction calculated using the methodology set 
forth in Sec. 3.132(b)(2), (b)(3), or (d), plus the fair

[[Page 140]]

value of the collateral posted by the clearing member client national 
bank or Federal savings association and held by the CCP or a clearing 
member in a manner that is not bankruptcy remote. When the national bank 
or Federal savings association calculates EAD for the cleared 
transaction under Sec. 3.132(d), EAD equals EADunstressed.
    (3) Cleared transaction risk weights. (i) For a cleared transaction 
with a QCCP, a clearing member client national bank or Federal savings 
association must apply a risk weight of:
    (A) 2 percent if the collateral posted by the national bank or 
Federal savings association to the QCCP or clearing member is subject to 
an arrangement that prevents any loss to the clearing member client 
national bank or Federal savings association 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 national bank or Federal savings 
association 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 an event of default or from liquidation, insolvency or 
receivership proceedings) the relevant court and administrative 
authorities would find the arrangements to be legal, valid, binding and 
enforceable under the law of the relevant jurisdictions.
    (B) 4 percent, if the requirements of Sec. 3.132(b)(3)(i)(A) are not 
met.
    (ii) For a cleared transaction with a CCP that is not a QCCP, a 
clearing member client national bank or Federal savings association must 
apply the risk weight applicable to the CCP under Sec. 3.32.
    (4) Collateral. (i) Notwithstanding any other requirement of this 
section, collateral posted by a clearing member client national bank or 
Federal savings association that is held by a custodian (in its capacity 
as custodian) in a manner that is bankruptcy remote from the CCP, the 
custodian, clearing member, and other clearing member clients of the 
clearing member, is not subject to a capital requirement under this 
section.
    (ii) A clearing member client national bank or Federal savings 
association 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. 3.131.
    (c) Clearing member national bank or Federal savings association--
(1) Risk-weighted assets for cleared transactions. (i) To determine the 
risk-weighted asset amount for a cleared transaction, a clearing member 
national bank or Federal savings association 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 national bank's or Federal savings 
association'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 national bank or 
Federal savings association must calculate its trade exposure amount for 
a cleared transaction as follows:
    (i) For a cleared transaction that is a derivative contract or a 
netting set of derivative contracts, trade exposure amount equals the 
EAD calculated using the methodology used to calculate EAD for OTC 
derivative contracts set forth in Sec. 3.132(c) or Sec. 3.132(d), plus 
the fair value of the collateral posted by the clearing member national 
bank or Federal savings association and held by the CCP in a manner that 
is not bankruptcy remote. When the clearing member national bank or 
Federal savings association calculates EAD for the cleared transaction 
using the methodology in Sec. 3.132(d), EAD equals 
EADunstressed.
    (ii) For a cleared transaction that is a repo-style transaction or 
netting set of repo-style transactions, trade exposure amount equals the 
EAD calculated under Secs. 3.132(b)(2), (b)(3), or (d), plus the fair 
value of the collateral posted by the clearing member national bank

[[Page 141]]

or Federal savings association and held by the CCP in a manner that is 
not bankruptcy remote. When the clearing member national bank or Federal 
savings association calculates EAD for the cleared transaction under 
Sec. 3.132(d), EAD equals EADunstressed.
    (3) Cleared transaction risk weights. (i) A clearing member national 
bank or Federal savings association must apply a risk weight of 2 
percent to the trade exposure amount for a cleared transaction with a 
QCCP.
    (ii) For a cleared transaction with a CCP that is not a QCCP, a 
clearing member national bank or Federal savings association must apply 
the risk weight applicable to the CCP according to Sec. 3.32.
    (4) Collateral. (i) Notwithstanding any other requirement of this 
section, collateral posted by a clearing member national bank or Federal 
savings association 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 clearing member national bank or Federal savings association 
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. 3.131
    (d) Default fund contributions--(1) General requirement. A clearing 
member national bank or Federal savings association 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 national 
bank or Federal savings association or the OCC, 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 national bank's or Federal 
savings association'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 or an amount determined 
by the OCC, based on factors such as size, structure and membership 
characteristics of the CCP and riskiness of its transactions, in cases 
where such default fund contributions may be unlimited.
    (3) Risk-weighted asset amount for default fund contributions to 
QCCPs. A clearing member national bank's or Federal savings 
association'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 the methodology set forth in paragraph 
(d)(3)(i) of this section (Method 1), multiplied by 1,250 percent or 
paragraph (d)(3)(iv) of this section (Method 2).
    (i) Method 1. The hypothetical capital requirement of a QCCP 
(KCCP) equals:
[GRAPHIC] [TIFF OMITTED] TR11OC13.042


Where
    (A) EBRMi = the EAD for each transaction cleared through 
the QCCP by clearing member i, calculated using the methodology used to 
calculate EAD for OTC derivative contracts set forth in Sec. 3.132(c)(5) 
and Sec. 3.132.(c)(6) or the methodology used to calculate EAD for repo-
style transactions set forth in Sec. 3.132(b)(2) for repo-style 
transactions, provided that:
    (1) For purposes of this section, when calculating the EAD, the 
national bank or Federal savings association may replace the formula 
provided in Sec. 3.132(c)(6)(ii) with the following formula:
    Anet = (0.15 x Agross) + (0.85 x NGR x 
Agross); and
    (2) For option derivative contracts that are cleared transactions, 
the PFE described in Sec. 3.132(c)(5) must be adjusted by multiplying 
the notional principal amount of the derivative contract by the 
appropriate conversion factor in Table 2 to Sec. 3.132 and the absolute 
value of the option's delta, that is, the ratio of the change in the 
value of

[[Page 142]]

the derivative contract to the corresponding change in the price of the 
underlying asset.
    (3) For repo-style transactions, when applying Sec. 3.132(b)(2), the 
national bank or Federal savings association must use the methodology in 
Sec. 3.132(b)(2)(ii).
    (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 has actually received from 
clearing member i;
    (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 OCC has determined that a 
higher risk weight is more appropriate based on the specific 
characteristics of the QCCP and its clearing members; and
    (F) Where a QCCP has provided its KCCP, a national bank 
or Federal savings association must rely on such disclosed figure 
instead of calculating KCCP under this paragraph (d), unless 
the national bank or Federal savings association determines that a more 
conservative figure is appropriate based on the nature, structure, or 
characteristics of the QCCP.
    (ii) For a national bank or Federal savings association that is a 
clearing member of a QCCP with a default fund supported by funded 
commitments, KCM equals:

[[Page 143]]

[GRAPHIC] [TIFF OMITTED] TR11OC13.043


[[Page 144]]


[GRAPHIC] [TIFF OMITTED] TR11OC13.044


Where:
    (A) DFi = the national bank's or Federal savings 
association's unfunded commitment to the default fund;
    (B) DFCM = the total of all clearing members' unfunded 
commitments to the default fund; and
    (C) K*CM as defined in paragraph (d)(3)(ii) of this section.
    (D) For a national bank or Federal savings association that is a 
clearing member of a QCCP with a default fund supported by unfunded 
commitments and that is unable to calculate KCM using the 
methodology described above in this paragraph (d)(3)(iii), 
KCM equals:
[GRAPHIC] [TIFF OMITTED] TR11OC13.046


[[Page 145]]



Where:
    (1) IMi = the national bank's or Federal savings 
association's initial margin posted to the QCCP;
    (2) IMCM = the total of initial margin posted to the 
QCCP; and
    (3) K*CM as defined above in this paragraph (d)(3)(iii).
    (iv) Method 2. A clearing member national bank's or Federal savings 
association's risk-weighted asset amount for its default fund 
contribution to a QCCP, RWADF, equals:

RWADF = Min {12.5 * DF; 0.18 * TE{time} 


Where:
    (A) TE = the national bank's or Federal savings association's trade 
exposure amount to the QCCP calculated according to section 133(c)(2);
    (B) DF = the funded portion of the national bank's or Federal 
savings association's default fund contribution to the QCCP.
    (v) Total risk-weighted assets for default fund contributions. Total 
risk-weighted assets for default fund contributions is the sum of a 
clearing member national bank's or Federal savings association's risk-
weighted assets for all of its default fund contributions to all CCPs of 
which the national bank or Federal savings association is a clearing 
member.



Sec. 3.134  Guarantees and credit derivatives: PD substitution 
and LGD adjustment approaches.

    (a) Scope. (1) This section applies to wholesale exposures for 
which:
    (i) Credit risk is fully covered by an eligible guarantee or 
eligible credit derivative; or
    (ii) Credit risk is covered on a pro rata basis (that is, on a basis 
in which the national bank or Federal savings association and the 
protection provider share losses proportionately) by an eligible 
guarantee or eligible credit derivative.
    (2) Wholesale exposures on which there is a tranching of credit risk 
(reflecting at least two different levels of seniority) are 
securitization exposures subject to Sec. 3.141 through Sec. 3.145.
    (3) A national bank or Federal savings association may elect to 
recognize the credit risk mitigation benefits of an eligible guarantee 
or eligible credit derivative covering an exposure described in 
paragraph (a)(1) of this section by using the PD substitution approach 
or the LGD adjustment approach in paragraph (c) of this section or, if 
the transaction qualifies, using the double default treatment in 
Sec. 3.135. A national bank's or Federal savings association's PD and 
LGD for the hedged exposure may not be lower than the PD and LGD floors 
described in Sec. 3.131(d)(2) and (d)(3).
    (4) If multiple eligible guarantees or eligible credit derivatives 
cover a single exposure described in paragraph (a)(1) of this section, a 
national bank or Federal savings association may treat the hedged 
exposure as multiple separate exposures each covered by a single 
eligible guarantee or eligible credit derivative and may calculate a 
separate risk-based capital requirement for each separate exposure as 
described in paragraph (a)(3) of this section.
    (5) If a single eligible guarantee or eligible credit derivative 
covers multiple hedged wholesale exposures described in paragraph (a)(1) 
of this section, a national bank or Federal savings association must 
treat each hedged exposure as covered by a separate eligible guarantee 
or eligible credit derivative and must calculate a separate risk-based 
capital requirement for each exposure as described in paragraph (a)(3) 
of this section.
    (6) A national bank or Federal savings association must use the same 
risk parameters for calculating ECL as it uses for calculating the risk-
based capital requirement for the exposure.
    (b) Rules of recognition. (1) A national bank or Federal savings 
association may only recognize the credit risk mitigation benefits of 
eligible guarantees and eligible credit derivatives.
    (2) A national bank or Federal savings association 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:

[[Page 146]]

    (i) The reference exposure ranks pari passu (that is, equally) with 
or is junior to the hedged exposure; and
    (ii) The reference exposure and the hedged exposure are exposures to 
the same legal entity, and legally enforceable cross-default or cross-
acceleration clauses are in place to assure payments under the credit 
derivative are triggered when the obligor fails to pay under the terms 
of the hedged exposure.
    (c) Risk parameters for hedged exposures--(1) PD substitution 
approach--(i) Full coverage. If an eligible guarantee or eligible credit 
derivative meets the conditions in paragraphs (a) and (b) of this 
section and the protection amount (P) of the guarantee or credit 
derivative is greater than or equal to the EAD of the hedged exposure, a 
national bank or Federal savings association may recognize the guarantee 
or credit derivative in determining the national bank's or Federal 
savings association's risk-based capital requirement for the hedged 
exposure by substituting the PD associated with the rating grade of the 
protection provider for the PD associated with the rating grade of the 
obligor in the risk-based capital formula applicable to the guarantee or 
credit derivative in Table 1 of Sec. 3.131 and using the appropriate LGD 
as described in paragraph (c)(1)(iii) of this section. If the national 
bank or Federal savings association determines that full substitution of 
the protection provider's PD leads to an inappropriate degree of risk 
mitigation, the national bank or Federal savings association may 
substitute a higher PD than that of the protection provider.
    (ii) Partial coverage. If an eligible guarantee or eligible credit 
derivative meets the conditions in paragraphs (a) and (b) of this 
section and P of the guarantee or credit derivative is less than the EAD 
of the hedged exposure, the national bank or Federal savings association 
must treat the hedged exposure as two separate exposures (protected and 
unprotected) in order to recognize the credit risk mitigation benefit of 
the guarantee or credit derivative.
    (A) The national bank or Federal savings association must calculate 
its risk-based capital requirement for the protected exposure under 
Sec. 3.131, where PD is the protection provider's PD, LGD is determined 
under paragraph (c)(1)(iii) of this section, and EAD is P. If the 
national bank or Federal savings association determines that full 
substitution leads to an inappropriate degree of risk mitigation, the 
national bank or Federal savings association may use a higher PD than 
that of the protection provider.
    (B) The national bank or Federal savings association must calculate 
its risk-based capital requirement for the unprotected exposure under 
Sec. 3.131, where PD is the obligor's PD, LGD is the hedged exposure's 
LGD (not adjusted to reflect the guarantee or credit derivative), and 
EAD is the EAD of the original hedged exposure minus P.
    (C) The treatment in paragraph (c)(1)(ii) of this section is 
applicable when the credit risk of a wholesale exposure is covered on a 
partial pro rata basis or when an adjustment is made to the effective 
notional amount of the guarantee or credit derivative under paragraphs 
(d), (e), or (f) of this section.
    (iii) LGD of hedged exposures. The LGD of a hedged exposure under 
the PD substitution approach is equal to:
    (A) The lower of the LGD of the hedged exposure (not adjusted to 
reflect the guarantee or credit derivative) and the LGD of the guarantee 
or credit derivative, if the guarantee or credit derivative provides the 
national bank or Federal savings association with the option to receive 
immediate payout upon triggering the protection; or
    (B) The LGD of the guarantee or credit derivative, if the guarantee 
or credit derivative does not provide the national bank or Federal 
savings association with the option to receive immediate payout upon 
triggering the protection.
    (2) LGD adjustment approach. (i) Full coverage. If an eligible 
guarantee or eligible credit derivative meets the conditions in 
paragraphs (a) and (b) of this section and the protection amount (P) of 
the guarantee or credit derivative is greater than or equal to the EAD 
of the hedged exposure, the national bank's or Federal savings 
association's risk-

[[Page 147]]

based capital requirement for the hedged exposure is the greater of:
    (A) The risk-based capital requirement for the exposure as 
calculated under Sec. 3.131, with the LGD of the exposure adjusted to 
reflect the guarantee or credit derivative; or
    (B) The risk-based capital requirement for a direct exposure to the 
protection provider as calculated under Sec. 3.131, using the PD for the 
protection provider, the LGD for the guarantee or credit derivative, and 
an EAD equal to the EAD of the hedged exposure.
    (ii) Partial coverage. If an eligible guarantee or eligible credit 
derivative meets the conditions in paragraphs (a) and (b) of this 
section and the protection amount (P) of the guarantee or credit 
derivative is less than the EAD of the hedged exposure, the national 
bank or Federal savings association must treat the hedged exposure as 
two separate exposures (protected and unprotected) in order to recognize 
the credit risk mitigation benefit of the guarantee or credit 
derivative.
    (A) The national bank's or Federal savings association's risk-based 
capital requirement for the protected exposure would be the greater of:
    (1) The risk-based capital requirement for the protected exposure as 
calculated under Sec. 3.131, with the LGD of the exposure adjusted to 
reflect the guarantee or credit derivative and EAD set equal to P; or
    (2) The risk-based capital requirement for a direct exposure to the 
guarantor as calculated under Sec. 3.131, using the PD for the 
protection provider, the LGD for the guarantee or credit derivative, and 
an EAD set equal to P.
    (B) The national bank or Federal savings association must calculate 
its risk-based capital requirement for the unprotected exposure under 
Sec. 3.131, where PD is the obligor's PD, LGD is the hedged exposure's 
LGD (not adjusted to reflect the guarantee or credit derivative), and 
EAD is the EAD of the original hedged exposure minus P.
    (3) M of hedged exposures. For purposes of this paragraph (c), the M 
of the hedged exposure is the same as the M of the exposure if it were 
unhedged.
    (d) Maturity mismatch. (1) A national bank or Federal savings 
association that recognizes an eligible guarantee or eligible credit 
derivative in determining its risk-based capital requirement for a 
hedged exposure must adjust the effective notional amount of the credit 
risk mitigant to reflect any maturity mismatch between the hedged 
exposure and the credit risk mitigant.
    (2) A maturity mismatch occurs when the residual maturity of a 
credit risk mitigant is less than that of the hedged exposure(s).
    (3) The residual maturity of a hedged exposure is the longest 
possible remaining time before the obligor is scheduled to fulfil its 
obligation on the exposure. If a credit risk mitigant has embedded 
options that may reduce its term, the national bank or Federal savings 
association (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 national bank or Federal savings association 
(protection purchaser), but the terms of the arrangement at origination 
of the credit risk mitigant contain a positive incentive for the 
national bank or Federal savings association to call the transaction 
before contractual maturity, the remaining time to the first call date 
is the residual maturity of the credit risk mitigant.\26\
---------------------------------------------------------------------------

    \26\ For example, where there is a step-up in cost in conjunction 
with a call feature or where the effective cost of protection increases 
over time even if credit quality remains the same or improves, the 
residual maturity of the credit risk mitigant will be the remaining time 
to the first call.
---------------------------------------------------------------------------

    (4) A credit risk mitigant with a maturity mismatch may be 
recognized only if its original maturity is greater than or equal to one 
year and its residual maturity is greater than three months.
    (5) When a maturity mismatch exists, the national bank or Federal 
savings association must apply the following adjustment to the effective 
notional amount of the credit risk mitigant:

Pm = E x (t - 0.25)/(T - 0.25),


where:

[[Page 148]]

    (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) Credit derivatives without restructuring as a credit event. If a 
national bank or Federal savings association 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 national bank or Federal 
savings association must apply the following adjustment to the effective 
notional amount of the credit derivative:

Pr = Pm x 0.60,


where:
    (1) Pr = effective notional amount of the credit risk 
mitigant, adjusted for lack of restructuring event (and maturity 
mismatch, if applicable); and
    (2) Pm = effective notional amount of the credit risk 
mitigant adjusted for maturity mismatch (if applicable).
    (f) Currency mismatch. (1) If a national bank or Federal savings 
association 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 national bank or Federal 
savings association 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 national bank or Federal savings association must set 
HFX equal to 8 percent unless it qualifies for the use of and 
uses its own internal estimates of foreign exchange volatility based on 
a ten-business-day holding period and daily marking-to-market and 
remargining. A national bank or Federal savings association qualifies 
for the use of its own internal estimates of foreign exchange volatility 
if it qualifies for:
    (i) The own-estimates haircuts in Sec. 3.132(b)(2)(iii);
    (ii) The simple VaR methodology in Sec. 3.132(b)(3); or
    (iii) The internal models methodology in Sec. 3.132(d).
    (3) A national bank or Federal savings association must adjust 
HFX calculated in paragraph (f)(2) of this section upward if 
the national bank or Federal savings association revalues the guarantee 
or credit derivative less frequently than once every ten business days 
using the square root of time formula provided in 
Sec. 3.132(b)(2)(iii)(A)(2).



Sec. 3.135  Guarantees and credit derivatives: double default
treatment.

    (a) Eligibility and operational criteria for double default 
treatment. A national bank or Federal savings association may recognize 
the credit risk mitigation benefits of a guarantee or credit derivative 
covering an exposure described in Sec. 3.134(a)(1) by applying the 
double default treatment in this section if all the following criteria 
are satisfied:
    (1) The hedged exposure is fully covered or covered on a pro rata 
basis by:
    (i) An eligible guarantee issued by an eligible double default 
guarantor; or
    (ii) An eligible credit derivative that meets the requirements of 
Sec. 3.134(b)(2) and that is issued by an eligible double default 
guarantor.
    (2) The guarantee or credit derivative is:
    (i) An uncollateralized guarantee or uncollateralized credit 
derivative (for example, a credit default swap) that provides protection 
with respect to a single reference obligor; or

[[Page 149]]

    (ii) An nth-to-default credit derivative (subject to the 
requirements of Sec. 3.142(m).
    (3) The hedged exposure is a wholesale exposure (other than a 
sovereign exposure).
    (4) The obligor of the hedged exposure is not:
    (i) An eligible double default guarantor or an affiliate of an 
eligible double default guarantor; or
    (ii) An affiliate of the guarantor.
    (5) The national bank or Federal savings association does not 
recognize any credit risk mitigation benefits of the guarantee or credit 
derivative for the hedged exposure other than through application of the 
double default treatment as provided in this section.
    (6) The national bank or Federal savings association has implemented 
a process (which has received the prior, written approval of the OCC) to 
detect excessive correlation between the creditworthiness of the obligor 
of the hedged exposure and the protection provider. If excessive 
correlation is present, the national bank or Federal savings association 
may not use the double default treatment for the hedged exposure.
    (b) Full coverage. If a transaction meets the criteria in paragraph 
(a) of this section and the protection amount (P) of the guarantee or 
credit derivative is at least equal to the EAD of the hedged exposure, 
the national bank or Federal savings association may determine its risk-
weighted asset amount for the hedged exposure under paragraph (e) of 
this section.
    (c) Partial coverage. If a transaction meets the criteria in 
paragraph (a) of this section and the protection amount (P) of the 
guarantee or credit derivative is less than the EAD of the hedged 
exposure, the national bank or Federal savings association must treat 
the hedged exposure as two separate exposures (protected and 
unprotected) in order to recognize double default treatment on the 
protected portion of the exposure:
    (1) For the protected exposure, the national bank or Federal savings 
association must set EAD equal to P and calculate its risk-weighted 
asset amount as provided in paragraph (e) of this section; and
    (2) For the unprotected exposure, the national bank or Federal 
savings association must set EAD equal to the EAD of the original 
exposure minus P and then calculate its risk-weighted asset amount as 
provided in Sec. 3.131.
    (d) Mismatches. For any hedged exposure to which a national bank or 
Federal savings association applies double default treatment under this 
part, the national bank or Federal savings association must make 
applicable adjustments to the protection amount as required in 
Sec. 3.134(d), (e), and (f).
    (e) The double default dollar risk-based capital requirement. The 
dollar risk-based capital requirement for a hedged exposure to which a 
national bank or Federal savings association has applied double default 
treatment is KDD multiplied by the EAD of the exposure. 
KDD is calculated according to the following formula:

KDD = Ko x (0.15 + 160 x PDg),


Where:
    (1)
    [GRAPHIC] [TIFF OMITTED] TR11OC13.048
    
    (2) PDg = PD of the protection provider.
    (3) PDo = PD of the obligor of the hedged exposure.
    (4) LGDg =
    (i) The lower of the LGD of the hedged exposure (not adjusted to 
reflect the guarantee or credit derivative) and the LGD of the guarantee 
or credit derivative, if the guarantee or credit derivative provides the 
national bank or Federal savings association with the option to receive 
immediate payout on triggering the protection; or

[[Page 150]]

    (ii) The LGD of the guarantee or credit derivative, if the guarantee 
or credit derivative does not provide the national bank or Federal 
savings association with the option to receive immediate payout on 
triggering the protection; and
    (5) [rho]os (asset value correlation of the obligor) is 
calculated according to the appropriate formula for (R) provided in 
Table 1 in Sec. 3.131, with PD equal to PDo.
    (6) b (maturity adjustment coefficient) is calculated according to 
the formula for b provided in Table 1 in Sec. 3.131, with PD equal to 
the lesser of PDo and PDg; and
    (7) M (maturity) is the effective maturity of the guarantee or 
credit derivative, which may not be less than one year or greater than 
five years.



Sec. 3.136  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) 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) The positive current exposure of a national bank or Federal 
savings association 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 national bank or Federal savings association to the counterparty.
    (b) Scope. This section applies to all transactions involving 
securities, foreign exchange instruments, and commodities that have a 
risk of delayed settlement or delivery. This section does not apply to:
    (1) Cleared transactions that are subject to daily marking-to-market 
and daily receipt and payment of variation margin;
    (2) Repo-style transactions, including unsettled repo-style 
transactions (which are addressed in Secs. 3.131 and 132);
    (3) One-way cash payments on OTC derivative contracts (which are 
addressed in Secs. 3. 131 and 132); or
    (4) Transactions with a contractual settlement period that is longer 
than the normal settlement period (which are treated as OTC derivative 
contracts and addressed in Secs. 3.131 and 132).
    (c) System-wide failures. In the case of a system-wide failure of a 
settlement or clearing system, or a central counterparty, the OCC 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 national bank or Federal savings association must hold 
risk-based capital against any DvP or PvP transaction with a normal 
settlement period if the national bank's or Federal savings 
association's counterparty has not made delivery or payment within five 
business days after the settlement date. The national bank or Federal 
savings association must determine its risk-weighted asset amount for 
such a transaction by multiplying the positive current exposure of the 
transaction for the national bank or Federal savings association by the 
appropriate risk weight in Table 1 to Sec. 3.136.

     Table 1 toSec. 3.136--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
From 16 to 30...........................................             625
From 31 to 45...........................................           937.5
46 or more..............................................           1,250
------------------------------------------------------------------------


[[Page 151]]

    (e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-versus-
payment) transactions. (1) A national bank or Federal savings 
association must hold risk-based capital against any non-DvP/non-PvP 
transaction with a normal settlement period if the national bank or 
Federal savings association 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 national bank or 
Federal savings association must continue to hold risk-based capital 
against the transaction until the national bank or Federal savings 
association has received its corresponding deliverables.
    (2) From the business day after the national bank or Federal savings 
association has made its delivery until five business days after the 
counterparty delivery is due, the national bank or Federal savings 
association must calculate its risk-based capital requirement for the 
transaction by treating the current fair value of the deliverables owed 
to the national bank or Federal savings association as a wholesale 
exposure.
    (i) A national bank or Federal savings association may use a 45 
percent LGD for the transaction rather than estimating LGD for the 
transaction provided the national bank or Federal savings association 
uses the 45 percent LGD for all transactions described in 
Sec. 3.135(e)(1) and (e)(2).
    (ii) A national bank or Federal savings association may use a 100 
percent risk weight for the transaction provided the national bank or 
Federal savings association uses this risk weight for all transactions 
described in Secs. 3.135(e)(1) and (e)(2).
    (3) If the national bank or Federal savings association has not 
received its deliverables by the fifth business day after the 
counterparty delivery was due, the national bank or Federal savings 
association must apply a 1,250 percent risk weight to the current fair 
value of the deliverables owed to the national bank or Federal savings 
association.
    (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.



Secs. 3.137-3.140  [Reserved]

            Risk-Weighted Assets for Securitization Exposures



Sec. 3.141  Operational criteria for recognizing the transfer of risk.

    (a) Operational criteria for traditional securitizations. A national 
bank or Federal savings association that transfers exposures it has 
originated or purchased to a securitization SPE or other third party in 
connection with a traditional securitization may exclude the exposures 
from the calculation of its risk-weighted assets only if each of the 
conditions in this paragraph (a) is satisfied. A national bank or 
Federal savings association that meets these conditions must hold risk-
based capital against any securitization exposures it retains in 
connection with the securitization. A national bank or Federal savings 
association 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 national bank's or Federal 
savings association's consolidated balance sheet under GAAP;
    (2) The national bank or Federal savings association has transferred 
to one or more third parties credit risk associated with the underlying 
exposures;
    (3) Any clean-up calls relating to the securitization are eligible 
clean-up calls; and
    (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 national bank or Federal savings 
association may recognize for risk-based capital purposes under this 
subpart the use of a credit

[[Page 152]]

risk mitigant to hedge underlying exposures only if each of the 
conditions in this paragraph (b) is satisfied. A national bank or 
Federal savings association 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 national bank or Federal 
savings association that fails to meet these conditions or chooses not 
to recognize the credit risk mitigant for purposes of this section must 
hold risk-based capital under this subpart against the underlying 
exposures as if they had not been synthetically securitized. The 
conditions are:
    (1) The credit risk mitigant is:
    (i) Financial collateral; or
    (ii) A guarantee that meets all of the requirements of an eligible 
guarantee in Sec. 3.2 except for paragraph (3) of the definition; or
    (iii) A credit derivative that meets all of the requirements of an 
eligible credit derivative except for paragraph (3) of the definition of 
eligible guarantee in Sec. 3.2.
    (2) The national bank or Federal savings association transfers 
credit risk associated with the underlying exposures to third parties, 
and the terms and conditions in the credit risk mitigants employed do 
not include provisions that:
    (i) Allow for the termination of the credit protection due to 
deterioration in the credit quality of the underlying exposures;
    (ii) Require the national bank or Federal savings association to 
alter or replace the underlying exposures to improve the credit quality 
of the underlying exposures;
    (iii) Increase the national bank's or Federal savings association'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 national 
bank or Federal savings association 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 national bank or Federal savings 
association after the inception of the securitization;
    (3) The national bank or Federal savings association 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 for securitization exposures. (1) 
Except for exposures that are deducted from common equity tier 1 capital 
and exposures subject to Sec. 3.142(k), if a national bank or Federal 
savings association is unable to demonstrate to the satisfaction of the 
OCC a comprehensive understanding of the features of a securitization 
exposure that would materially affect the performance of the exposure, 
the national bank or Federal savings association must assign a 1,250 
percent risk weight to the securitization exposure. The national bank's 
or Federal savings association's analysis must be commensurate with the 
complexity of the securitization exposure and the materiality of the 
position in relation to regulatory capital according to this part.
    (2) A national bank or Federal savings association must demonstrate 
its comprehensive understanding of a securitization exposure under 
paragraph (c)(1) of this section, for each securitization exposure by:
    (i) Conducting 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, fair value triggers, the performance of 
organizations that service the position, 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

[[Page 153]]

or other measures of creditworthiness; average loan-to-value ratio; and 
industry and geographic diversification data on the underlying 
exposure(s);
    (C) Relevant market data of the securitization, for example, bid-ask 
spreads, 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
    (D) 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; and
    (ii) On an on-going basis (no less frequently than quarterly), 
evaluating, reviewing, and updating as appropriate the analysis required 
under this section for each securitization exposure.



Sec. 3.142  Risk-weighted assets for securitization exposures.

    (a) Hierarchy of approaches. Except as provided elsewhere in this 
section and in Sec. 3.141:
    (1) A national bank or Federal savings association must deduct from 
common equity tier 1 capital any after-tax gain-on-sale resulting from a 
securitization and must apply a 1,250 percent risk weight to the portion 
of any CEIO that does not constitute after tax gain-on-sale;
    (2) If a securitization exposure does not require deduction or a 
1,250 percent risk weight under paragraph (a)(1) of this section, the 
national bank or Federal savings association must apply the supervisory 
formula approach in Sec. 3.143 to the exposure if the national bank or 
Federal savings association and the exposure qualify for the supervisory 
formula approach according to Sec. 3.143(a);
    (3) If a securitization exposure does not require deduction or a 
1,250 percent risk weight under paragraph (a)(1) of this section and 
does not qualify for the supervisory formula approach, the national bank 
or Federal savings association may apply the simplified supervisory 
formula approach under Sec. 3.144;
    (4) If a securitization exposure does not require deduction or a 
1,250 percent risk weight under paragraph (a)(1) of this section, does 
not qualify for the supervisory formula approach in Sec. 3.143, and the 
national bank or Federal savings association does not apply the 
simplified supervisory formula approach in Sec. 3.144, the national bank 
or Federal savings association must apply a 1,250 percent risk weight to 
the exposure; and
    (5) If a securitization exposure is a derivative contract (other 
than protection provided by a national bank or Federal savings 
association in the form of 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 national bank or 
Federal savings association may choose to set the risk-weighted asset 
amount of the exposure equal to the amount of the exposure as determined 
in paragraph (e) of this section rather than apply the hierarchy of 
approaches described in paragraphs (a)(1) through (4) of this section.
    (b) Total risk-weighted assets for securitization exposures. A 
national bank's or Federal savings association's total risk-weighted 
assets for securitization exposures is equal to the sum of its risk-
weighted assets calculated using Secs. 3.141 through 146.
    (c) Deductions. A national bank or Federal savings association may 
calculate any deduction from common equity tier 1 capital for a 
securitization exposure net of any DTLs associated with the 
securitization exposure.
    (d) Maximum risk-based capital requirement. Except as provided in 
Sec. 3.141(c), unless one or more underlying exposures does not meet the 
definition of a wholesale, retail, securitization, or equity exposure, 
the total risk-based capital requirement for all securitization 
exposures held by a single national bank or Federal savings association 
associated with a single securitization (excluding any risk-based 
capital requirements that relate to the national bank's or Federal 
savings association's gain-on-sale or CEIOs associated with the 
securitization) may not exceed the sum of:
    (1) The national bank's or Federal savings association's total risk-
based capital requirement for the underlying

[[Page 154]]

exposures calculated under this subpart as if the national bank or 
Federal savings association directly held the underlying exposures; and
    (2) The total ECL of the underlying exposures calculated under this 
subpart.
    (e) Exposure amount of a securitization exposure. (1) The exposure 
amount of an on-balance sheet securitization exposure that is not a 
repo-style transaction, eligible margin loan, OTC derivative contract, 
or cleared transaction is the national bank's or Federal savings 
association's carrying value.
    (2) Except as provided in paragraph (m) of this section, the 
exposure amount of an off-balance sheet securitization exposure that is 
not an OTC derivative contract (other than a credit derivative), repo-
style transaction, eligible margin loan, or cleared transaction (other 
than a credit derivative) is the notional amount of the exposure. For an 
off-balance-sheet securitization exposure to an ABCP program, such as an 
eligible ABCP liquidity facility, the notional amount may be reduced to 
the maximum potential amount that the national bank or Federal savings 
association could be required to fund given the ABCP program's current 
underlying assets (calculated without regard to the current credit 
quality of those assets).
    (3) The exposure amount of a securitization exposure that is a repo-
style transaction, eligible margin loan, or OTC derivative contract 
(other than a credit derivative) or cleared transaction (other than a 
credit derivative) is the EAD of the exposure as calculated in 
Sec. 3.132 or Sec. 3.133.
    (f) Overlapping exposures. If a national bank or Federal savings 
association has multiple securitization exposures that provide 
duplicative coverage of the underlying exposures of a securitization 
(such as when a national bank or Federal savings association provides a 
program-wide credit enhancement and multiple pool-specific liquidity 
facilities to an ABCP program), the national bank or Federal savings 
association is not required to hold duplicative risk-based capital 
against the overlapping position. Instead, the national bank or Federal 
savings association may assign to the overlapping securitization 
exposure the applicable risk-based capital treatment under this subpart 
that results in the highest risk-based capital requirement.
    (g) Securitizations of non-IRB exposures. Except as provided in 
Sec. 3.141(c), if a national bank or Federal savings association has a 
securitization exposure where any underlying exposure is not a wholesale 
exposure, retail exposure, securitization exposure, or equity exposure, 
the national bank or Federal savings association:
    (1) Must deduct from common equity tier 1 capital any after-tax 
gain-on-sale resulting from the securitization and apply a 1,250 percent 
risk weight to the portion of any CEIO that does not constitute gain-on-
sale, if the national bank or Federal savings association is an 
originating national bank or Federal savings association;
    (2) May apply the simplified supervisory formula approach in 
Sec. 3.144 to the exposure, if the securitization exposure does not 
require deduction or a 1,250 percent risk weight under paragraph (g)(1) 
of this section;
    (3) Must assign a 1,250 percent risk weight to the exposure if the 
securitization exposure does not require deduction or a 1,250 percent 
risk weight under paragraph (g)(1) of this section, does not qualify for 
the supervisory formula approach in Sec. 3.143, and the national bank or 
Federal savings association does not apply the simplified supervisory 
formula approach in Sec. 3.144 to the exposure.
    (h) Implicit support. If a national bank or Federal savings 
association provides support to a securitization in excess of the 
national bank's or Federal savings association's contractual obligation 
to provide credit support to the securitization (implicit support):
    (1) The national bank or Federal savings association must calculate 
a risk-weighted asset amount for 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 national bank or Federal savings association must disclose 
publicly:

[[Page 155]]

    (i) That it has provided implicit support to the securitization; and
    (ii) The regulatory capital impact to the national bank or Federal 
savings association of providing such implicit support.
    (i) Undrawn portion of a servicer cash advance facility. (1) 
Notwithstanding any other provision of this subpart, a national bank or 
Federal savings association that is a servicer under an eligible 
servicer cash advance facility is not required to hold risk-based 
capital against potential future cash advance payments that it may be 
required to provide under the contract governing the facility.
    (2) For a national bank or Federal savings association that acts as 
a servicer, the exposure amount for a servicer cash advance facility 
that is not an eligible servicer cash advance facility is equal to the 
amount of all potential future cash advance payments that the national 
bank or Federal savings association may be contractually required to 
provide during the subsequent 12 month period under the contract 
governing the facility.
    (j) Interest-only mortgage-backed securities. Regardless of any 
other provisions in this part, the risk weight for a non-credit-
enhancing interest-only mortgage-backed security may not be less than 
100 percent.
    (k) Small-business loans and leases on personal property transferred 
with recourse. (1) Notwithstanding any other provisions of this subpart 
E, a national bank or Federal savings association that has transferred 
small-business loans and leases on personal property (small-business 
obligations) with recourse must include in risk-weighted assets only the 
contractual amount of retained recourse if all the following conditions 
are met:
    (i) The transaction is a sale under GAAP.
    (ii) The national bank or Federal savings association establishes 
and maintains, pursuant to GAAP, a non-capital reserve sufficient to 
meet the national bank's or Federal savings association's reasonably 
estimated liability under the recourse arrangement.
    (iii) The loans and leases are to businesses that meet the criteria 
for a small-business concern established by the Small Business 
Administration under section 3(a) of the Small Business Act (15 U.S.C. 
632 et seq.); and
    (iv) The national bank or Federal savings association is well-
capitalized, as defined in 12 CFR 6.4. For purposes of determining 
whether a national bank or Federal savings association is well 
capitalized for purposes of this paragraph (k), the national bank's or 
Federal savings association's capital ratios must be calculated without 
regard to the capital treatment for transfers of small-business 
obligations with recourse specified in paragraph (k)(1) of this section.
    (2) The total outstanding amount of recourse retained by a national 
bank or Federal savings association on transfers of small-business 
obligations subject to paragraph (k)(1) of this section cannot exceed 15 
percent of the national bank's or Federal savings association's total 
capital.
    (3) If a national bank or Federal savings association ceases to be 
well capitalized or exceeds the 15 percent capital limitation in 
paragraph (k)(2) of this section, the preferential capital treatment 
specified in paragraph (k)(1) of this section will continue to apply to 
any transfers of small-business obligations with recourse that occurred 
during the time that the national bank or Federal savings association 
was well capitalized and did not exceed the capital limit.
    (4) The risk-based capital ratios of a national bank or Federal 
savings association 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.
    (l) Nth-to-default credit derivatives--(1) Protection provider. A 
national bank or Federal savings association must determine a risk 
weight using the supervisory formula approach (SFA) pursuant to 
Sec. 3.143 or the simplified supervisory formula approach (SSFA) 
pursuant to Sec. 3.144 for an nth-to-default credit derivative in 
accordance with this paragraph (l). In the case of credit protection 
sold, a national bank or Federal savings association must determine its 
exposure in the nth-to-default

[[Page 156]]

credit derivative as the largest notional amount of all the underlying 
exposures.
    (2) For purposes of determining the risk weight for an 
nth-to-default credit derivative using the SFA or the SSFA, 
the national bank or Federal savings association 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 national bank's or Federal savings association's exposure to the 
total notional amount of all underlying exposures. For purposes of the 
SSFA, parameter A is expressed as a decimal value between zero and one. 
For purposes of using the SFA to calculate the risk weight for its 
exposure in an nth-to-default credit derivative, parameter A 
must be set equal to the credit enhancement level (L) input to the SFA 
formula. In the case of a first-to-default credit derivative, there are 
no underlying exposures that are subordinated to the national bank's or 
Federal savings association's exposure. In the case of a second-or-
subsequent-to-default credit derivative, the smallest (n-1) risk-
weighted asset amounts of the underlying exposure(s) are subordinated to 
the national bank's or Federal savings association's exposure.
    (ii) The detachment point (parameter D) equals the sum of parameter 
A plus the ratio of the notional amount of the national bank's or 
Federal savings association's exposure in the nth-to-default 
credit derivative to the total notional amount of all underlying 
exposures. For purposes of the SSFA, parameter W is expressed as a 
decimal value between zero and one. For purposes of the SFA, parameter D 
must be set to equal L plus the thickness of tranche T input to the SFA 
formula.
    (3) A national bank or Federal savings association that does not use 
the SFA or the SSFA to determine a risk weight for its exposure in an 
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 
national bank or Federal savings association 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. 3.134(b) 
must determine its risk-based capital requirement under this subpart for 
the underlying exposures as if the national bank or Federal savings 
association synthetically securitized the underlying exposure with the 
lowest risk-based capital requirement and had obtained no credit risk 
mitigant on the other underlying exposures. A national bank or Federal 
savings association must calculate a risk-based capital requirement for 
counterparty credit risk according to Sec. 3.132 for a first-to-default 
credit derivative that does not meet the rules of recognition of 
Sec. 3.134(b).
    (ii) Second-or-subsequent-to-default credit derivatives. (A) A 
national bank or Federal savings association 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. 3.134(b) (other than a first-to-default credit derivative) may 
recognize the credit risk mitigation benefits of the derivative only if:
    (1) The national bank or Federal savings association 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 national bank or Federal savings association satisfies the 
requirements of paragraph (l)(3)(ii)(A) of this section, the national 
bank or Federal savings association must determine its risk-based 
capital requirement for the underlying exposures as if the bank had only 
synthetically securitized the underlying exposure with the 
nth smallest risk-based capital requirement and had obtained 
no credit risk mitigant on the other underlying exposures.
    (C) A national bank or Federal savings association must calculate a 
risk-based capital requirement for counterparty credit risk according to 
Sec. 3.132 for a nth-to-default credit derivative that does 
not meet the rules of recognition of Sec. 3.134(b).

[[Page 157]]

    (m) Guarantees and credit derivatives other than nth-to-default 
credit derivatives--(1) Protection provider. For a guarantee or credit 
derivative (other than an nth-to-default credit derivative) 
provided by a national bank or Federal savings association that covers 
the full amount or a pro rata share of a securitization exposure's 
principal and interest, the national bank or Federal savings association 
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) A national bank or Federal savings 
association that purchases an OTC credit derivative (other than an 
nth-to-default credit derivative) that is recognized under 
Sec. 3.145 as a credit risk mitigant (including via recognized 
collateral) is not required to compute a separate counterparty credit 
risk capital requirement under Sec. 3.131 in accordance with 
Sec. 3.132(c)(3).
    (ii) If a national bank or Federal savings association cannot, or 
chooses not to, recognize a purchased credit derivative as a credit risk 
mitigant under Sec. 3.145, the national bank or Federal savings 
association must determine the exposure amount of the credit derivative 
under Sec. 3.132(c).
    (A) If the national bank or Federal savings association purchases 
credit protection from a counterparty that is not a securitization SPE, 
the national bank or Federal savings association must determine the risk 
weight for the exposure according Sec. 3.131.
    (B) If the national bank or Federal savings association purchases 
the credit protection from a counterparty that is a securitization SPE, 
the national bank or Federal savings association must determine the risk 
weight for the exposure according to this section, including paragraph 
(a)(5) of this section for a credit derivative that has a first priority 
claim on the cash flows from the underlying exposures of the 
securitization SPE (notwithstanding amounts due under interest rate or 
currency derivative contracts, fees due, or other similar payments.

[78 FR 62157, 62273, 62274, Oct. 11, 2013]



Sec. 3.143  Supervisory formula approach (SFA).

    (a) Eligibility requirements. A national bank or Federal savings 
association must use the SFA to determine its risk-weighted asset amount 
for a securitization exposure if the national bank or Federal savings 
association can calculate on an ongoing basis each of the SFA parameters 
in paragraph (e) of this section.
    (b) Mechanics. The risk-weighted asset amount for a securitization 
exposure equals its SFA risk-based capital requirement as calculated 
under paragraph (c) and (d) of this section, multiplied by 12.5.
    (c) The SFA risk-based capital requirement. (1) If KIRB 
is greater than or equal to L + T, an exposure's SFA risk-based capital 
requirement equals the exposure amount.
    (2) If KIRB is less than or equal to L, an exposure's SFA 
risk-based capital requirement is UE multiplied by TP multiplied by the 
greater of:
    (i) F [middot] T (where F is 0.016 for all securitization 
exposures); or
    (ii) S[L + T]-S[L].
    (3) If KIRB is greater than L and less than L + T, the 
national bank or Federal savings association must apply a 1,250 percent 
risk weight to an amount equal to UE [middot] TP (KIRB-L), 
and the exposure's SFA risk-based capital requirement is UE multiplied 
by TP multiplied by the greater of:
    (i) F [middot] (T-(KIRB-L)) (where F is 0.016 for all 
other securitization exposures); or
    (ii) S[L + T]-S[KIRB].
    (d) The supervisory formula:

[[Page 158]]

[GRAPHIC] [TIFF OMITTED] TR11OC13.049

    (e) SFA parameters. For purposes of the calculations in paragraphs 
(c) and (d) of this section:
    (1) Amount of the underlying exposures (UE). UE is the EAD of any 
underlying exposures that are wholesale and retail exposures (including 
the amount of any funded spread accounts, cash collateral accounts, and 
other similar funded credit enhancements) plus the amount of any 
underlying exposures that are securitization exposures (as defined in 
Sec. 3.142(e)) plus the adjusted carrying value of any underlying 
exposures that are equity exposures (as defined in Sec. 3.151(b)).
    (2) Tranche percentage (TP). TP is the ratio of the amount of the 
national bank's or Federal savings association's securitization exposure 
to the amount of the tranche that contains the securitization exposure.
    (3) Capital requirement on underlying exposures (KIRB). (i) 
KIRB is the ratio of:
    (A) The sum of the risk-based capital requirements for the 
underlying exposures plus the expected credit losses of

[[Page 159]]

the underlying exposures (as determined under this subpart E as if the 
underlying exposures were directly held by the national bank or Federal 
savings association); to
    (B) UE.
    (ii) The calculation of KIRB must reflect the effects of 
any credit risk mitigant applied to the underlying exposures (either to 
an individual underlying exposure, to a group of underlying exposures, 
or to all of the underlying exposures).
    (iii) All assets related to the securitization are treated as 
underlying exposures, including assets in a reserve account (such as a 
cash collateral account).
    (4) Credit enhancement level (L). (i) L is the ratio of:
    (A) The amount of all securitization exposures subordinated to the 
tranche that contains the national bank's or Federal savings 
association's securitization exposure; to
    (B) UE.
    (ii) A national bank or Federal savings association must determine L 
before considering the effects of any tranche-specific credit 
enhancements.
    (iii) Any gain-on-sale or CEIO associated with the securitization 
may not be included in L.
    (iv) Any reserve account funded by accumulated cash flows from the 
underlying exposures that is subordinated to the tranche that contains 
the national bank's or Federal savings association's securitization 
exposure may be included in the numerator and denominator of L to the 
extent cash has accumulated in the account. Unfunded reserve accounts 
(that is, reserve accounts that are to be funded from future cash flows 
from the underlying exposures) may not be included in the calculation of 
L.
    (v) In some cases, the purchase price of receivables will reflect a 
discount that provides credit enhancement (for example, first loss 
protection) for all or certain tranches of the securitization. When this 
arises, L should be calculated inclusive of this discount if the 
discount provides credit enhancement for the securitization exposure.
    (5) Thickness of tranche (T). T is the ratio of:
    (i) The amount of the tranche that contains the national bank's or 
Federal savings association's securitization exposure; to
    (ii) UE.
    (6) Effective number of exposures (N). (i) Unless the national bank 
or Federal savings association elects to use the formula provided in 
paragraph (f) of this section,
[GRAPHIC] [TIFF OMITTED] TR11OC13.050


where EADi represents the EAD associated with the ith 
instrument in the underlying exposures.
    (ii) Multiple exposures to one obligor must be treated as a single 
underlying exposure.
    (iii) In the case of a resecuritization, the national bank or 
Federal savings association must treat each underlying exposure as a 
single underlying exposure and must not look through to the originally 
securitized underlying exposures.
    (7) Exposure-weighted average loss given default (EWALGD). EWALGD is 
calculated as:

[[Page 160]]

[GRAPHIC] [TIFF OMITTED] TR11OC13.051

where LGDi represents the average LGD associated with all 
exposures to the ith obligor. In the case of a resecuritization, an LGD 
of 100 percent must be assumed for the underlying exposures that are 
themselves securitization exposures.

    (f) Simplified method for computing N and EWALGD. (1) If all 
underlying exposures of a securitization are retail exposures, a 
national bank or Federal savings association may apply the SFA using the 
following simplifications:
    (i) h = 0; and
    (ii) v = 0.
    (2) Under the conditions in Secs. 3.143(f)(3) and (f)(4), a national 
bank or Federal savings association may employ a simplified method for 
calculating N and EWALGD.
    (3) If C1 is no more than 0.03, a national bank or 
Federal savings association may set EWALGD = 0.50 if none of the 
underlying exposures is a securitization exposure, or may set EWALGD = 1 
if one or more of the underlying exposures is a securitization exposure, 
and may set N equal to the following amount:
[GRAPHIC] [TIFF OMITTED] TR11OC13.052

    where:
    (i) Cm is the ratio of the sum of the amounts of the `m' 
largest underlying exposures to UE; and
    (ii) The level of m is to be selected by the national bank or 
Federal savings association.
    (4) Alternatively, if only C1 is available and 
C1 is no more than 0.03, the national bank or Federal savings 
association may set EWALGD = 0.50 if none of the underlying exposures is 
a securitization exposure, or may set EWALGD = 1 if one or more of the 
underlying exposures is a securitization exposure and may set N = 1/
C1.



Sec. 3.144  Simplified supervisory formula approach (SSFA).

    (a) General requirements for the SSFA. To use the SSFA to determine 
the risk weight for a securitization exposure, a national bank or 
Federal savings association 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; if the contracts 
governing the underlying exposures of the securitization require 
payments on a monthly or quarterly basis, the data used to assign the 
parameters described in paragraph (b) of this section must be no more 
than 91 calendar days old. A national bank or Federal savings 
association that does not have the appropriate data to assign the 
parameters described in paragraph (b) of 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 national bank or Federal 
savings association 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 subpart D of this part. 
KG

[[Page 161]]

is expressed as a decimal value between zero and one (that is, an 
average risk weight of 100 percent represents a value of KG 
equal to 0.08).
    (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 of the securitization that meet any of the criteria 
as set forth in paragraphs (b)(2)(i) through (vi) of this section to the 
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 payments for 90 days or more, other 
than principal or interest payments deferred on:
    (A) Federally-guaranteed student loans, in accordance with the terms 
of those guarantee programs; or
    (B) Consumer loans, including non-federally-guaranteed student 
loans, provided that such payments are deferred pursuant to provisions 
included in the contract at the time funds are disbursed that provide 
for period(s) of deferral that are not initiated based on changes in the 
creditworthiness of the borrower; 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. Except as provided in section 142(l) for 
nth-to-default credit derivatives, parameter A equals the 
ratio of the current dollar amount of underlying exposures that are 
subordinated to the exposure of the national bank or Federal savings 
association 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 national bank's or Federal savings 
association'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. Except as 
provided in section 142(l) for nth-to-default credit 
derivatives, 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 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 
securitization exposure, as appropriate, is the larger of the risk 
weight determined in accordance with this paragraph (c), paragraph (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 national bank or 
Federal savings association 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. For the purpose of this weighted-average 
calculation:

[[Page 162]]

[GRAPHIC] [TIFF OMITTED] TR11OC13.053



Sec. 3.145  Recognition of credit risk mitigants for securitization
exposures.

    (a) General. An originating national bank or Federal savings 
association that has obtained a credit risk mitigant to hedge its 
securitization exposure to a synthetic or traditional securitization 
that satisfies the operational criteria in Sec. 3.141 may recognize the 
credit risk mitigant, but only as provided in this section. An investing 
national bank or Federal savings association that has obtained a credit 
risk mitigant to hedge a securitization exposure may recognize the 
credit risk mitigant, but only as provided in this section.
    (b) Collateral. (1) Rules of recognition. A national bank or Federal 
savings association may recognize financial collateral in determining 
the national bank's or Federal savings association's risk-weighted asset 
amount for a securitization exposure (other than a repo-style 
transaction, an eligible margin loan, or an OTC derivative contract for 
which the national bank or Federal savings association has reflected 
collateral in its determination of exposure

[[Page 163]]

amount under Sec. 3.132) as follows. The national bank's or Federal 
savings association's risk-weighted asset amount for the collateralized 
securitization exposure is equal to the risk-weighted asset amount for 
the securitization exposure as calculated under the SSFA in Sec. 3.144 
or under the SFA in Sec. 3.143 multiplied by the ratio of adjusted 
exposure amount (SE*) to original exposure amount (SE),

Where:
    (i) SE* = max {0, [SE-C x (1-Hs-Hfx)]{time} ;
    (ii) SE = the amount of the securitization exposure calculated under 
Sec. 3.142(e);
    (iii) C = the current fair value of the collateral;
    (iv) Hs = the haircut appropriate to the collateral type; 
and
    (v) Hfx = the haircut appropriate for any currency 
mismatch between the collateral and the exposure.
[GRAPHIC] [TIFF OMITTED] TR11OC13.054

    (3) Standard supervisory haircuts. Unless a national bank or Federal 
savings association qualifies for use of and uses own-estimates haircuts 
in paragraph (b)(4) of this section:
    (i) A national bank or Federal savings association must use the 
collateral type haircuts (Hs) in Table 1 to Sec. 3.132 of 
this subpart;
    (ii) A national bank or Federal savings association must use a 
currency mismatch haircut (Hfx) of 8 percent if the exposure 
and the collateral are denominated in different currencies;
    (iii) A national bank or Federal savings association must multiply 
the supervisory haircuts obtained in paragraphs (b)(3)(i) and (ii) of 
this section by the square root of 6.5 (which equals 2.549510); and
    (iv) A national bank or Federal savings association must adjust the 
supervisory haircuts upward on the basis of a holding period longer than 
65 business days where and as appropriate to take into account the 
illiquidity of the collateral.
    (4) Own estimates for haircuts. With the prior written approval of 
the OCC, a national bank or Federal savings association may calculate 
haircuts using its own internal estimates of market price volatility and 
foreign exchange volatility, subject to Sec. 3.132(b)(2)(iii). The 
minimum holding period (TM) for securitization exposures is 
65 business days.
    (c) Guarantees and credit derivatives--(1) Limitations on 
recognition. A national bank or Federal savings association may only 
recognize an eligible guarantee or eligible credit derivative provided 
by an eligible guarantor in determining the national bank's or Federal 
savings association's risk-weighted asset amount for a securitization 
exposure.
    (2) ECL for securitization exposures. When a national bank or 
Federal savings association recognizes an eligible guarantee or eligible 
credit derivative provided by an eligible guarantor in determining the 
national bank's or Federal savings association's risk-weighted asset 
amount for a securitization exposure, the national bank or Federal 
savings association must also:
    (i) Calculate ECL for the protected portion of the exposure using 
the same risk parameters that it uses for calculating the risk-weighted 
asset amount of the exposure as described in paragraph (c)(3) of this 
section; and
    (ii) Add the exposure's ECL to the national bank's or Federal 
savings association's total ECL.

[[Page 164]]

    (3) Rules of recognition. A national bank or Federal savings 
association may recognize an eligible guarantee or eligible credit 
derivative provided by an eligible guarantor in determining the national 
bank's or Federal savings association's risk-weighted asset amount for 
the securitization exposure as follows:
    (i) Full coverage. If the protection amount of the eligible 
guarantee or eligible credit derivative equals or exceeds the amount of 
the securitization exposure, the national bank or Federal savings 
association may set the risk-weighted asset amount for the 
securitization exposure equal to the risk-weighted asset amount for a 
direct exposure to the eligible guarantor (as determined in the 
wholesale risk weight function described in Sec. 3.131), using the 
national bank's or Federal savings association's PD for the guarantor, 
the national bank's or Federal savings association's LGD for the 
guarantee or credit derivative, and an EAD equal to the amount of the 
securitization exposure (as determined in Sec. 3.142(e)).
    (ii) Partial coverage. If the protection amount of the eligible 
guarantee or eligible credit derivative is less than the amount of the 
securitization exposure, the national bank or Federal savings 
association may set the risk-weighted asset amount for the 
securitization exposure equal to the sum of:
    (A) Covered portion. The risk-weighted asset amount for a direct 
exposure to the eligible guarantor (as determined in the wholesale risk 
weight function described in Sec. 3.131), using the national bank's or 
Federal savings association's PD for the guarantor, the national bank's 
or Federal savings association's LGD for the guarantee or credit 
derivative, and an EAD equal to the protection amount of the credit risk 
mitigant; and
    (B) Uncovered portion. (1) 1.0 minus the ratio of the protection 
amount of the eligible guarantee or eligible credit derivative to the 
amount of the securitization exposure); multiplied by
    (2) The risk-weighted asset amount for the securitization exposure 
without the credit risk mitigant (as determined in Secs. 3.142 through 
146).
    (4) Mismatches. The national bank or Federal savings association 
must make applicable adjustments to the protection amount as required in 
Sec. 3.134(d), (e), and (f) for any hedged securitization exposure and 
any more senior securitization exposure that benefits from the hedge. In 
the context of a synthetic securitization, when an eligible guarantee or 
eligible credit derivative covers multiple hedged exposures that have 
different residual maturities, the national bank or Federal savings 
association must use the longest residual maturity of any of the hedged 
exposures as the residual maturity of all the hedged exposures.



Secs. 3.146-3.150  [Reserved]

                Risk-Weighted Assets for Equity Exposures



Sec. 3.151  Introduction and exposure measurement.

    (a) General. (1) To calculate its risk-weighted asset amounts for 
equity exposures that are not equity exposures to investment funds, a 
national bank or Federal savings association may apply either the Simple 
Risk Weight Approach (SRWA) in Sec. 3.152 or, if it qualifies to do so, 
the Internal Models Approach (IMA) in Sec. 3.153. A national bank or 
Federal savings association must use the look-through approaches 
provided in Sec. 3.154 to calculate its risk-weighted asset amounts for 
equity exposures to investment funds.
    (2) A national bank or Federal savings association must treat an 
investment in a separate account (as defined in Sec. 3.2), as if it were 
an equity exposure to an investment fund as provided in Sec. 3.154.
    (3) Stable value protection. (i) Stable value protection means a 
contract where the provider of the contract is obligated to pay:
    (A) The policy owner of a separate account an amount equal to the 
shortfall between the fair value and cost basis of the separate account 
when the policy owner of the separate account surrenders the policy, or
    (B) The beneficiary of the contract an amount equal to the shortfall 
between the fair value and book value of a specified portfolio of 
assets.

[[Page 165]]

    (ii) A national bank or Federal savings association that purchases 
stable value protection on its investment in a separate account must 
treat the portion of the carrying value of its investment in the 
separate account attributable to the stable value protection as an 
exposure to the provider of the protection and the remaining portion of 
the carrying value of its separate account as an equity exposure to an 
investment fund.
    (iii) A national bank or Federal savings association that provides 
stable value protection must treat the exposure as an equity derivative 
with an adjusted carrying value determined as the sum of 
Sec. 3.151(b)(1) and (2).
    (b) Adjusted carrying value. For purposes of this subpart, the 
adjusted carrying value of an equity exposure is:
    (1) For the on-balance sheet component of an equity exposure, the 
national bank's or Federal savings association's carrying value of the 
exposure;
    (2) For the off-balance sheet component of an equity exposure, the 
effective notional principal amount of the exposure, the size of which 
is equivalent to a hypothetical on-balance sheet position in the 
underlying equity instrument that would evidence the same change in fair 
value (measured in dollars) for a given small change in the price of the 
underlying equity instrument, minus the adjusted carrying value of the 
on-balance sheet component of the exposure as calculated in paragraph 
(b)(1) of this section.
    (3) For unfunded equity commitments that are unconditional, the 
effective notional principal amount is the notional amount of the 
commitment. For unfunded equity commitments that are conditional, the 
effective notional principal amount is the national bank's or Federal 
savings association's best estimate of the amount that would be funded 
under economic downturn conditions.



Sec. 3.152  Simple risk weight approach (SRWA).

    (a) General. Under the SRWA, a national bank's or Federal savings 
association's aggregate risk-weighted asset amount for its equity 
exposures is equal to the sum of the risk-weighted asset amounts for 
each of the national bank's or Federal savings association's individual 
equity exposures (other than equity exposures to an investment fund) as 
determined in this section and the risk-weighted asset amounts for each 
of the national bank's or Federal savings association's individual 
equity exposures to an investment fund as determined in Sec. 3.154.
    (b) SRWA computation for individual equity exposures. A national 
bank or Federal savings association 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 section.
    (1) Zero percent risk weight equity exposures. An equity exposure to 
an entity whose credit exposures are exempt from the 0.03 percent PD 
floor in Sec. 3.131(d)(2) is assigned a zero percent risk weight.
    (2) 20 percent risk weight equity exposures. An equity exposure to a 
Federal Home Loan Bank or the Federal Agricultural Mortgage Corporation 
(Farmer Mac) is assigned a 20 percent risk weight.
    (3) 100 percent risk weight equity exposures. The following equity 
exposures are assigned a 100 percent risk weight:
    (i) Community development equity exposures. An equity exposure that 
qualifies as a community development investment under section 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.
    (ii) Effective portion of hedge pairs. The effective portion of a 
hedge pair.
    (iii) Non-significant equity exposures. Equity exposures, excluding 
significant investments in the capital of an unconsolidated institution 
in the form of common stock and exposures to an investment firm that 
would meet the definition of a traditional securitization were it not 
for the OCC's application of

[[Page 166]]

paragraph (8) of that definition in Sec. 3.2 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 national bank's 
or Federal savings association's total capital.
    (A) To compute the aggregate adjusted carrying value of a national 
bank's or Federal savings association's equity exposures for purposes of 
this section, the national bank or Federal savings association 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 national 
bank or Federal savings association does not know the actual holdings of 
the investment fund, the national bank or Federal savings association 
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 national bank or 
Federal savings association 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 national bank's or Federal savings 
association's equity exposures qualifies for a 100 percent risk weight 
under this section, a national bank or Federal savings association 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 non-publicly 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 in 
the form of common stock that are not deducted from capital pursuant to 
Sec. 3.22(b)(4) 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)(6) of this section and including the ineffective portion of a hedge 
pair) is 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)(6) of this 
section) that is not publicly traded is assigned a 400 percent risk 
weight.
    (7) 600 percent risk weight equity exposures. An equity exposure to 
an investment firm that:
    (i) Would meet the definition of a traditional securitization were 
it not for the OCC's application of paragraph (8) of that definition in 
Sec. 3.2; and
    (ii) Has greater than immaterial leverage is assigned a 600 percent 
risk weight.
    (c) Hedge transactions--(1) Hedge pair. A hedge pair is two equity 
exposures that form an effective hedge so long as each equity exposure 
is publicly traded or has a return that is primarily based on a publicly 
traded equity exposure.
    (2) Effective hedge. Two equity exposures form an effective hedge if 
the exposures either have the same remaining maturity or each has a 
remaining maturity of at least three months; the hedge relationship is 
formally documented in a prospective manner (that is, before the 
national bank or Federal savings association acquires at least one of 
the equity exposures); the documentation specifies the measure of 
effectiveness (E) the national bank or Federal savings association 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 
national bank or Federal savings association 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 
national bank or Federal savings association

[[Page 167]]

must determine the ratio of value change (RVC). The RVC is the ratio of 
the cumulative sum of the periodic changes in value of one equity 
exposure to the cumulative sum of the periodic changes in the value of 
the other equity exposure. If RVC is positive, the hedge is not 
effective and E equals zero. 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] TR11OC13.055

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



Sec. 3.153  Internal models approach (IMA).

    (a) General. A national bank or Federal savings association may 
calculate its risk-weighted asset amount for equity exposures using the 
IMA by modeling publicly traded and non-publicly traded equity exposures 
(in accordance with paragraph (c) of this section) or by modeling only 
publicly traded equity exposures (in accordance with paragraphs (c) and 
(d) of this section).
    (b) Qualifying criteria. To qualify to use the IMA to calculate 
risk-weighted assets for equity exposures, a national bank or Federal 
savings association must receive prior written approval from the OCC. To 
receive such approval, the national bank or Federal savings association 
must demonstrate to the OCC's satisfaction that the national bank or 
Federal savings association meets the following criteria:
    (1) The national bank or Federal savings association must have one 
or more models that:
    (i) Assess the potential decline in value of its modeled equity 
exposures;
    (ii) Are commensurate with the size, complexity, and composition of 
the national bank's or Federal savings association's modeled equity 
exposures; and
    (iii) Adequately capture both general market risk and idiosyncratic 
risk.
    (2) The national bank's or Federal savings association's model must 
produce an estimate of potential losses

[[Page 168]]

for its modeled equity exposures that is no less than the estimate of 
potential losses produced by a VaR methodology employing a 99th 
percentile one-tailed confidence interval of the distribution of 
quarterly returns for a benchmark portfolio of equity exposures 
comparable to the national bank's or Federal savings association's 
modeled equity exposures using a long-term sample period.
    (3) The number of risk factors and exposures in the sample and the 
data period used for quantification in the national bank's or Federal 
savings association's model and benchmarking exercise must be sufficient 
to provide confidence in the accuracy and robustness of the national 
bank's or Federal savings association's estimates.
    (4) The national bank's or Federal savings association's model and 
benchmarking process must incorporate data that are relevant in 
representing the risk profile of the national bank's or Federal savings 
association's modeled equity exposures, and must include data from at 
least one equity market cycle containing adverse market movements 
relevant to the risk profile of the national bank's or Federal savings 
association's modeled equity exposures. In addition, the national bank's 
or Federal savings association's benchmarking exercise must be based on 
daily market prices for the benchmark portfolio. If the national bank's 
or Federal savings association's model uses a scenario methodology, the 
national bank or Federal savings association must demonstrate that the 
model produces a conservative estimate of potential losses on the 
national bank's or Federal savings association's modeled equity 
exposures over a relevant long-term market cycle. If the national bank 
or Federal savings association employs risk factor models, the national 
bank or Federal savings association must demonstrate through empirical 
analysis the appropriateness of the risk factors used.
    (5) The national bank or Federal savings association must be able to 
demonstrate, using theoretical arguments and empirical evidence, that 
any proxies used in the modeling process are comparable to the national 
bank's or Federal savings association's modeled equity exposures and 
that the national bank or Federal savings association has made 
appropriate adjustments for differences. The national bank or Federal 
savings association must derive any proxies for its modeled equity 
exposures and benchmark portfolio using historical market data that are 
relevant to the national bank's or Federal savings association's modeled 
equity exposures and benchmark portfolio (or, where not, must use 
appropriately adjusted data), and such proxies must be robust estimates 
of the risk of the national bank's or Federal savings association's 
modeled equity exposures.
    (c) Risk-weighted assets calculation for a national bank or Federal 
savings association using the IMA for publicly traded and non-publicly 
traded equity exposures. If a national bank or Federal savings 
association models publicly traded and non-publicly traded equity 
exposures, the national bank's or Federal savings association's 
aggregate risk-weighted asset amount for its equity exposures is equal 
to the sum of:
    (1) The risk-weighted asset amount of each equity exposure that 
qualifies for a 0 percent, 20 percent, or 100 percent risk weight under 
Sec. 3.152(b)(1) through (b)(3)(i) (as determined under Sec. 3.152) and 
each equity exposure to an investment fund (as determined under 
Sec. 3.154); and
    (2) The greater of:
    (i) The estimate of potential losses on the national bank's or 
Federal savings association's equity exposures (other than equity 
exposures referenced in paragraph (c)(1) of this section) generated by 
the national bank's or Federal savings association's internal equity 
exposure model multiplied by 12.5; or
    (ii) The sum of:
    (A) 200 percent multiplied by the aggregate adjusted carrying value 
of the national bank's or Federal savings association's publicly traded 
equity exposures that do not belong to a hedge pair, do not qualify for 
a 0 percent, 20 percent, or 100 percent risk weight under 
Sec. 3.152(b)(1) through (b)(3)(i), and are not equity exposures to an 
investment fund;

[[Page 169]]

    (B) 200 percent multiplied by the aggregate ineffective portion of 
all hedge pairs; and
    (C) 300 percent multiplied by the aggregate adjusted carrying value 
of the national bank's or Federal savings association's equity exposures 
that are not publicly traded, do not qualify for a 0 percent, 20 
percent, or 100 percent risk weight under Sec. 3.152(b)(1) through 
(b)(3)(i), and are not equity exposures to an investment fund.
    (d) Risk-weighted assets calculation for a national bank or Federal 
savings association using the IMA only for publicly traded equity 
exposures. If a national bank or Federal savings association models only 
publicly traded equity exposures, the national bank's or Federal savings 
association's aggregate risk-weighted asset amount for its equity 
exposures is equal to the sum of:
    (1) The risk-weighted asset amount of each equity exposure that 
qualifies for a 0 percent, 20 percent, or 100 percent risk weight under 
Secs. 3.152(b)(1) through (b)(3)(i) (as determined under Sec. 3.152), 
each equity exposure that qualifies for a 400 percent risk weight under 
Sec. 3.152(b)(5) or a 600 percent risk weight under Sec. 3.152(b)(6) (as 
determined under Sec. 3.152), and each equity exposure to an investment 
fund (as determined under Sec. 3.154); and
    (2) The greater of:
    (i) The estimate of potential losses on the national bank's or 
Federal savings association's equity exposures (other than equity 
exposures referenced in paragraph (d)(1) of this section) generated by 
the national bank's or Federal savings association's internal equity 
exposure model multiplied by 12.5; or
    (ii) The sum of:
    (A) 200 percent multiplied by the aggregate adjusted carrying value 
of the national bank's or Federal savings association's publicly traded 
equity exposures that do not belong to a hedge pair, do not qualify for 
a 0 percent, 20 percent, or 100 percent risk weight under 
Sec. 3.152(b)(1) through (b)(3)(i), and are not equity exposures to an 
investment fund; and
    (B) 200 percent multiplied by the aggregate ineffective portion of 
all hedge pairs.



Sec. 3.154  Equity exposures to investment funds.

    (a) Available approaches. (1) Unless the exposure meets the 
requirements for a community development equity exposure in 
Sec. 3.152(b)(3)(i), a national bank or Federal savings association must 
determine the risk-weighted asset amount of an equity exposure to an 
investment fund under the full look-through approach in paragraph (b) of 
this section, the simple modified look-through approach in paragraph (c) 
of this section, or the alternative modified look-through approach in 
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. 3.152(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 national bank or Federal savings association does not use 
the full look-through approach, the national bank or Federal savings 
association may use the ineffective portion of the hedge pair as 
determined under Sec. 3.152(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 national bank or Federal savings 
association 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 E of this part as if the 
proportional ownership share of each exposure were held directly by the 
national bank or Federal savings association) may either:
    (1) Set the risk-weighted asset amount of the national bank's or 
Federal savings association's exposure to the fund equal to the product 
of:
    (i) The aggregate risk-weighted asset amounts of the exposures held 
by the fund as if they were held directly by the national bank or 
Federal savings association; and
    (ii) The national bank's or Federal savings association's 
proportional ownership share of the fund; or

[[Page 170]]

    (2) Include the national bank's or Federal savings association's 
proportional ownership share of each exposure held by the fund in the 
national bank's or Federal savings association's IMA.
    (c) Simple modified look-through approach. Under this approach, the 
risk-weighted asset amount for a national bank's or Federal savings 
association's equity exposure to an investment fund equals the adjusted 
carrying value of the equity exposure multiplied by the highest risk 
weight assigned according to subpart D of this part that applies to any 
exposure the fund is permitted to hold under its prospectus, partnership 
agreement, or similar contract that defines the fund's permissible 
investments (excluding derivative contracts that are used for hedging 
rather than speculative purposes and that do not constitute a material 
portion of the fund's exposures).
    (d) Alternative modified look-through approach. Under this approach, 
a national bank or Federal savings association may assign the adjusted 
carrying value of an equity exposure to an investment fund on a pro rata 
basis to different risk weight categories assigned according to subpart 
D of this part 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 national 
bank's or Federal savings association's equity exposure to the 
investment fund equals the sum of each portion of the adjusted carrying 
value assigned to an exposure class multiplied by the applicable risk 
weight. If the sum of the investment limits for all exposure types 
within the fund exceeds 100 percent, the national bank or Federal 
savings association must assume that the fund invests to the maximum 
extent permitted under its investment limits in the exposure type with 
the highest risk weight under subpart D of this part, and continues to 
make investments in order of the exposure type with the next highest 
risk weight under subpart D of this part until the maximum total 
investment level is reached. If more than one exposure type applies to 
an exposure, the national bank or Federal savings association must use 
the highest applicable risk weight. A national bank or Federal savings 
association 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.



Sec. 3.155  Equity derivative contracts.

    (a) Under the IMA, in addition to holding risk-based capital against 
an equity derivative contract under this part, a national bank or 
Federal savings association must hold risk-based capital against the 
counterparty credit risk in the equity derivative contract by also 
treating the equity derivative contract as a wholesale exposure and 
computing a supplemental risk-weighted asset amount for the contract 
under Sec. 3.132.
    (b) Under the SRWA, a national bank or Federal savings association 
may choose not to hold risk-based capital against the counterparty 
credit risk of equity derivative contracts, as long as it does so for 
all such contracts. Where the equity derivative contracts are subject to 
a qualified master netting agreement, a national bank or Federal savings 
association using the SRWA must either include all or exclude all of the 
contracts from any measure used to determine counterparty credit risk 
exposure.



Secs. 3.166--3.160  [Reserved]

                Risk-Weighted Assets for Operational Risk



Sec. 3.161  Qualification requirements for incorporation of operational
risk mitigants.

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

[[Page 171]]

national bank's or Federal savings association's operational risk 
exposure adjusted to incorporate qualifying operational risk mitigants; 
and
    (2) The national bank's or Federal savings association's methodology 
for incorporating the effects of insurance, if the national bank or 
Federal savings association uses insurance as an operational risk 
mitigant, captures through appropriate discounts to the amount of risk 
mitigation:
    (i) The residual term of the policy, where less than one year;
    (ii) The cancellation terms of the policy, where less than one year;
    (iii) The policy's timeliness of payment;
    (iv) The uncertainty of payment by the provider of the policy; and
    (v) Mismatches in coverage between the policy and the hedged 
operational loss event.
    (b) Qualifying operational risk mitigants. Qualifying operational 
risk mitigants are:
    (1) Insurance that:
    (i) Is provided by an unaffiliated company that the national bank or 
Federal savings association deems to have strong capacity to meet its 
claims payment obligations and the obligor rating category to which the 
national bank or Federal savings association assigns the company is 
assigned a PD equal to or less than 10 basis points;
    (ii) Has an initial term of at least one year and a residual term of 
more than 90 days;
    (iii) Has a minimum notice period for cancellation by the provider 
of 90 days;
    (iv) Has no exclusions or limitations based upon regulatory action 
or for the receiver or liquidator of a failed depository institution; 
and
    (v) Is explicitly mapped to a potential operational loss event;
    (2) Operational risk mitigants other than insurance for which the 
OCC has given prior written approval. In evaluating an operational risk 
mitigant other than insurance, the OCC will consider whether the 
operational risk mitigant covers potential operational losses in a 
manner equivalent to holding total capital.



Sec. 3.162  Mechanics of risk-weighted asset calculation.

    (a) If a national bank or Federal savings association does not 
qualify to use or does not have qualifying operational risk mitigants, 
the national bank's or Federal savings association's dollar risk-based 
capital requirement for operational risk is its operational risk 
exposure minus eligible operational risk offsets (if any).
    (b) If a national bank or Federal savings association qualifies to 
use operational risk mitigants and has qualifying operational risk 
mitigants, the national bank's or Federal savings association's dollar 
risk-based capital requirement for operational risk is the greater of:
    (1) The national bank's or Federal savings association's operational 
risk exposure adjusted for qualifying operational risk mitigants minus 
eligible operational risk offsets (if any); or
    (2) 0.8 multiplied by the difference between:
    (i) The national bank's or Federal savings association's operational 
risk exposure; and
    (ii) Eligible operational risk offsets (if any).
    (c) The national bank's or Federal savings association's risk-
weighted asset amount for operational risk equals the national bank's or 
Federal savings association's dollar risk-based capital requirement for 
operational risk determined under sections 162(a) or (b) multiplied by 
12.5.



Secs. 3.163-3.170  [Reserved]

                               Disclosures



Sec. 3.171  Purpose and scope.

    Secs. 3.171 through 3.173 establish public disclosure requirements 
related to the capital requirements of a national bank or Federal 
savings association that is an advanced approaches national bank or 
Federal savings association.



Sec. 3.172  Disclosure requirements.

    (a) A national bank or Federal savings association that is an 
advanced approaches national bank or Federal savings association that 
has completed the parallel run process and that has

[[Page 172]]

received notification from the OCC pursuant to section 121(d) of subpart 
E of this part must publicly disclose each quarter its total and tier 1 
risk-based capital ratios and their components as calculated under this 
subpart (that is, common equity tier 1 capital, additional tier 1 
capital, tier 2 capital, total qualifying capital, and total risk-
weighted assets).
    (b) A national bank or Federal savings association that is an 
advanced approaches national bank or Federal savings association that 
has completed the parallel run process and that has received 
notification from the OCC pursuant to section 121(d) of subpart E of 
this part must comply with paragraph (c) of this section 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.
    (c)(1) A national bank or Federal savings association described in 
paragraph (b) of this section must provide timely public disclosures 
each calendar quarter of the information in the applicable tables in 
Sec. 3.173. If a significant change occurs, such that the most recent 
reported amounts are no longer reflective of the national bank's or 
Federal savings association'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 national bank's or Federal savings association's risk management 
objectives and policies, reporting system, and definitions) may be 
disclosed annually after the end of the fourth calendar quarter, 
provided that any significant changes to these are disclosed in the 
interim. Management may provide all of the disclosures required by this 
subpart in one place on the national bank's or Federal savings 
association's public Web site or may provide the disclosures in more 
than one public financial report or other regulatory reports, provided 
that the national bank or Federal savings association publicly provides 
a summary table specifically indicating the location(s) of all such 
disclosures.
    (2) A national bank or Federal savings association described in 
paragraph (b) of this section 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 national bank or Federal 
savings association must attest that the disclosures meet the 
requirements of this subpart.
    (3) If a national bank or Federal savings association described in 
paragraph (b) of this section believes that disclosure of specific 
commercial or financial information would prejudice seriously its 
position by making public information that is either proprietary or 
confidential in nature, the national bank or Federal savings association 
is not required to disclose those specific items, 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. 3.173  Disclosures by certain advanced approaches national banks
or Federal savings associations.

    (a) Except as provided in Sec. 3.172(b), a national bank or Federal 
savings association described in Sec. 3.172(b) must make the disclosures 
described in Tables 1 through 12 to Sec. 3.173. The national bank or 
Federal savings association must make these disclosures publicly 
available for each of the last three years (that is, twelve quarters) or 
such shorter period beginning on January 1, 2014.

[[Page 173]]



              Table 1 toSec. 3.173--Scope of Application
Qualitative disclosures.......  (a)..............  The name of the top
                                                    corporate entity in
                                                    the group to which
                                                    subpart E of this
                                                    part applies.
                                (b)..............  A brief description
                                                    of the differences
                                                    in the basis for
                                                    consolidating
                                                    entities\1\ 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.
------------------------------------------------------------------------
\1\ Such entities include securities, insurance and other financial
  subsidiaries, commercial subsidiaries (where permitted), and
  significant minority equity investments in insurance, financial and
  commercial entities.


                Table 2 toSec. 3.173--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 (net of tax)
                                                    and other reserves;
                                                    and
                                                   (5) Regulatory
                                                    adjustments and
                                                    deductions 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
                                                    adjustments and
                                                    deductions 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
                                                    adjustments and
                                                    deductions made to
                                                    total capital.
------------------------------------------------------------------------


                Table 3 toSec. 3.173--Capital Adequacy
Qualitative disclosures.......  (a)..............  A summary discussion
                                                    of the national
                                                    bank's or Federal
                                                    savings
                                                    association's
                                                    approach to
                                                    assessing the
                                                    adequacy of its
                                                    capital to support
                                                    current and future
                                                    activities.
Quantitative disclosures......  (b)..............  Risk-weighted assets
                                                    for credit risk
                                                    from:
                                                   (1) Wholesale
                                                    exposures;
                                                   (2) Residential
                                                    mortgage exposures;
                                                   (3) Qualifying
                                                    revolving exposures;
                                                   (4) Other retail
                                                    exposures;
                                                   (5) Securitization
                                                    exposures;
                                                   (6) Equity exposures:
                                                   (7) Equity exposures
                                                    subject to the
                                                    simple risk weight
                                                    approach; and
                                                   (8) Equity exposures
                                                    subject to the
                                                    internal models
                                                    approach.
                                (c)..............  Standardized market
                                                    risk-weighted assets
                                                    and advanced market
                                                    risk-weighted assets
                                                    as calculated under
                                                    subpart F of this
                                                    part:
                                                   (1) Standardized
                                                    approach for
                                                    specific risk; and
                                                   (2) Internal models
                                                    approach for
                                                    specific risk.
                                (d)..............  Risk-weighted assets
                                                    for operational
                                                    risk.
                                (e)..............  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.
                                (f)..............  Total risk-weighted
                                                    assets.
------------------------------------------------------------------------


[[Page 174]]


Table 4 toSec. 3.173--Capital Conservation and Countercyclical Capital
                                 Buffers
Qualitative disclosures.......  (a)..............  The national bank or
                                                    Federal savings
                                                    association must
                                                    publicly disclose
                                                    the geographic
                                                    breakdown of its
                                                    private sector
                                                    credit exposures
                                                    used in the
                                                    calculation of the
                                                    countercyclical
                                                    capital buffer.
Quantitative disclosures......  (b)..............  At least quarterly,
                                                    the national bank or
                                                    Federal savings
                                                    association must
                                                    calculate and
                                                    publicly disclose
                                                    the capital
                                                    conservation buffer
                                                    and the
                                                    countercyclical
                                                    capital buffer as
                                                    described under Sec.
                                                     3.11 of subpart B.
                                (c)..............  At least quarterly,
                                                    the national bank or
                                                    Federal savings
                                                    association must
                                                    calculate and
                                                    publicly disclose
                                                    the buffer retained
                                                    income of the
                                                    national bank or
                                                    Federal savings
                                                    association, as
                                                    described under Sec.
                                                     3.11 of subpart B.
                                (d)..............  At least quarterly,
                                                    the national bank or
                                                    Federal savings
                                                    association must
                                                    calculate and
                                                    publicly disclose
                                                    any limitations it
                                                    has on distributions
                                                    and discretionary
                                                    bonus payments
                                                    resulting from the
                                                    capital conservation
                                                    buffer and the
                                                    countercyclical
                                                    capital buffer
                                                    framework described
                                                    underSec. 3.11 of
                                                    subpart B, including
                                                    the maximum payout
                                                    amount for the
                                                    quarter.
------------------------------------------------------------------------

    (b) General qualitative disclosure requirement. For each separate 
risk area described in Tables 5 through 12 to Sec. 3.173, the national 
bank or Federal savings association must describe its risk management 
objectives and policies, including:
    (1) Strategies and processes;
    (2) The structure and organization of the relevant risk management 
function;
    (3) The scope and nature of risk reporting and/or measurement 
systems; and
    (4) Policies for hedging and/or mitigating risk and strategies and 
processes for monitoring the continuing effectiveness of hedges/
mitigants.

      Table 5 \1\ toSec. 3.173--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 7 to Sec.
                                                    3.173), including:
                                                   (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 entity uses to
                                                    estimate its
                                                    allowance for loan
                                                    and lease losses,
                                                    including
                                                    statistical methods
                                                    used where
                                                    applicable;
                                                   (6) Policy for
                                                    charging-off
                                                    uncollectible
                                                    amounts; and
                                                   (7) Discussion of the
                                                    national bank's or
                                                    Federal savings
                                                    association's credit
                                                    risk management
                                                    policy
Quantitative disclosures......  (b)..............  Total credit risk
                                                    exposures and
                                                    average credit risk
                                                    exposures, after
                                                    accounting offsets
                                                    in accordance with
                                                    GAAP,\2\ 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, national
                                                    banks or Federal
                                                    savings associations
                                                    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.
                                (c)..............  Geographic \3\
                                                    distribution of
                                                    exposures,
                                                    categorized in
                                                    significant areas by
                                                    major types of
                                                    credit exposure.
                                (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; \4\

[[Page 175]]

 
                                                   (5) The balance in
                                                    the allowance for
                                                    loan and lease
                                                    losses at the end of
                                                    each period,
                                                    disaggregated on the
                                                    basis of the
                                                    entity'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,\5\ further
                                                    categorized as
                                                    required by GAAP.
                                (g)..............  Reconciliation of
                                                    changes in ALLL.\6\
                                (h)..............  Remaining contractual
                                                    maturity breakdown
                                                    (for example, one
                                                    year or less) of the
                                                    whole portfolio,
                                                    categorized by
                                                    credit exposure.
------------------------------------------------------------------------
\1\ Table 5 toSec. 3.173 does not cover equity exposures, which should
  be reported in Table 9.
\2\ See, for example, ASC Topic 815-10 and 210-20 as they may be amended
  from time to time.
\3\ Geographical areas may comprise individual countries, groups of
  countries, or regions within countries. A national bank or Federal
  savings association might choose to define the geographical areas
  based on the way the company's portfolio is geographically managed.
  The criteria used to allocate the loans to geographical areas must be
  specified.
\4\ A national bank or Federal savings association is encouraged also to
  provide an analysis of the aging of past-due loans.
\5\ The portion of the general allowance that is not allocated to a
  geographical area should be disclosed separately.
\6\ 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 6 toSec. 3.173--Credit Risk: Disclosures for Portfolios Subject
                   to IRB Risk-Based Capital Formulas
Qualitative disclosures.......  (a)..............  Explanation and
                                                    review of the:
                                                   (1) Structure of
                                                    internal rating
                                                    systems and relation
                                                    between internal and
                                                    external ratings;
                                                   (2) Use of risk
                                                    parameter estimates
                                                    other than for
                                                    regulatory capital
                                                    purposes;
                                                   (3) Process for
                                                    managing and
                                                    recognizing credit
                                                    risk mitigation (see
                                                    Table 8 to Sec.
                                                    3.173); and
                                                   (4) Control
                                                    mechanisms for the
                                                    rating system,
                                                    including discussion
                                                    of independence,
                                                    accountability, and
                                                    rating systems
                                                    review.
                                (b)..............  Description of the
                                                    internal ratings
                                                    process, provided
                                                    separately for the
                                                    following:
                                                   (1) Wholesale
                                                    category;
                                                   (2) Retail
                                                    subcategories;
                                                   (i) Residential
                                                    mortgage exposures;
                                                   (ii) Qualifying
                                                    revolving exposures;
                                                    and
                                                   (iii) Other retail
                                                    exposures.
                                                   For each category and
                                                    subcategory above
                                                    the description
                                                    should include:
                                                   (A) The types of
                                                    exposure included in
                                                    the category/
                                                    subcategories; and
                                                   (B) The definitions,
                                                    methods and data for
                                                    estimation and
                                                    validation of PD,
                                                    LGD, and EAD,
                                                    including
                                                    assumptions employed
                                                    in the derivation of
                                                    these variables.\1\
Quantitative disclosures: risk  (c)..............  (1) For wholesale
 assessment.                                        exposures, present
                                                    the following
                                                    information across a
                                                    sufficient number of
                                                    PD grades (including
                                                    default) to allow
                                                    for a meaningful
                                                    differentiation of
                                                    credit risk: \2\
                                                   (i) Total EAD; \3\
                                                   (ii) Exposure-
                                                    weighted average LGD
                                                    (percentage);
                                                   (iii) Exposure-
                                                    weighted average
                                                    risk weight; and
                                                   (iv) Amount of
                                                    undrawn commitments
                                                    and exposure-
                                                    weighted average EAD
                                                    including average
                                                    drawdowns prior to
                                                    default for
                                                    wholesale exposures.
                                                   (2) For each retail
                                                    subcategory, present
                                                    the disclosures
                                                    outlined above
                                                    across a sufficient
                                                    number of segments
                                                    to allow for a
                                                    meaningful
                                                    differentiation of
                                                    credit risk.
Quantitative disclosures:       (d)..............  Actual losses in the
 historical results.                                preceding period for
                                                    each category and
                                                    subcategory and how
                                                    this differs from
                                                    past experience. A
                                                    discussion of the
                                                    factors that
                                                    impacted the loss
                                                    experience in the
                                                    preceding period--
                                                    for example, has the
                                                    national bank or
                                                    Federal savings
                                                    association
                                                    experienced higher
                                                    than average default
                                                    rates, loss rates or
                                                    EADs.

[[Page 176]]

 
                                (e)..............  The national bank's
                                                    or Federal savings
                                                    association's
                                                    estimates compared
                                                    against actual
                                                    outcomes over a
                                                    longer period.\4\ At
                                                    a minimum, this
                                                    should include
                                                    information on
                                                    estimates of losses
                                                    against actual
                                                    losses in the
                                                    wholesale category
                                                    and each retail
                                                    subcategory over a
                                                    period sufficient to
                                                    allow for a
                                                    meaningful
                                                    assessment of the
                                                    performance of the
                                                    internal rating
                                                    processes for each
                                                    category/
                                                    subcategory.\5\
                                                    Where appropriate,
                                                    the national bank or
                                                    Federal savings
                                                    association should
                                                    further decompose
                                                    this to provide
                                                    analysis of PD, LGD,
                                                    and EAD outcomes
                                                    against estimates
                                                    provided in the
                                                    quantitative risk
                                                    assessment
                                                    disclosures
                                                    above.\6\
------------------------------------------------------------------------
\1\ This disclosure item does not require a detailed description of the
  model in full--it should provide the reader with a broad overview of
  the model approach, describing definitions of the variables and
  methods for estimating and validating those variables set out in the
  quantitative risk disclosures below. This should be done for each of
  the four category/subcategories. The national bank or Federal savings
  association must disclose any significant differences in approach to
  estimating these variables within each category/subcategories.
\2\ The PD, LGD and EAD disclosures in Table 6 (c) toSec. 3.173 should
  reflect the effects of collateral, qualifying master netting
  agreements, eligible guarantees and eligible credit derivatives as
  defined under this part. Disclosure of each PD grade should include
  the exposure-weighted average PD for each grade. Where a national bank
  or Federal savings association aggregates PD grades for the purposes
  of disclosure, this should be a representative breakdown of the
  distribution of PD grades used for regulatory capital purposes.
\3\ Outstanding loans and EAD on undrawn commitments can be presented on
  a combined basis for these disclosures.
\4\ These disclosures are a way of further informing the reader about
  the reliability of the information provided in the ``quantitative
  disclosures: Risk assessment'' over the long run. The disclosures are
  requirements from year-end 2010; in the meantime, early adoption is
  encouraged. The phased implementation is to allow a national bank or
  Federal savings association sufficient time to build up a longer run
  of data that will make these disclosures meaningful.
\5\ This disclosure item is not intended to be prescriptive about the
  period used for this assessment. Upon implementation, it is expected
  that a national bank or Federal savings association would provide
  these disclosures for as long a set of data as possible--for example,
  if a national bank or Federal savings association has 10 years of
  data, it might choose to disclose the average default rates for each
  PD grade over that 10-year period. Annual amounts need not be
  disclosed.
\6\ A national bank or Federal savings association must provide this
  further decomposition where it will allow users greater insight into
  the reliability of the estimates provided in the ``quantitative
  disclosures: Risk assessment.'' In particular, it must provide this
  information where there are material differences between its estimates
  of PD, LGD or EAD compared to actual outcomes over the long run. The
  national bank or Federal savings association must also provide
  explanations for such differences.


 Table 7 toSec. 3.173--General Disclosure for Counterparty Credit Risk
   of OTC Derivative Contracts, Repo-Style Transactions, and Eligible
                              Margin Loans
Qualitative Disclosures.......  (a)..............  The general
                                                    qualitative
                                                    disclosure
                                                    requirement with
                                                    respect to OTC
                                                    derivatives,
                                                    eligible margin
                                                    loans, and repo-
                                                    style transactions,
                                                    including:
                                                   (1) Discussion of
                                                    methodology used to
                                                    assign economic
                                                    capital and credit
                                                    limits for
                                                    counterparty credit
                                                    exposures;
                                                   (2) Discussion of
                                                    policies for
                                                    securing collateral,
                                                    valuing and managing
                                                    collateral, and
                                                    establishing credit
                                                    reserves;
                                                   (3) Discussion of the
                                                    primary types of
                                                    collateral taken;
                                                   (4) Discussion of
                                                    policies with
                                                    respect to wrong-way
                                                    risk exposures; and
                                                   (5) Discussion of the
                                                    impact of the amount
                                                    of collateral the
                                                    national bank or
                                                    Federal savings
                                                    association would
                                                    have to provide if
                                                    the national bank or
                                                    Federal savings
                                                    association were to
                                                    receive a credit
                                                    rating downgrade.
Quantitative Disclosures......  (b)..............  Gross positive fair
                                                    value of contracts,
                                                    netting benefits,
                                                    netted current
                                                    credit exposure,
                                                    collateral held
                                                    (including type, for
                                                    example, cash,
                                                    government
                                                    securities), and net
                                                    unsecured credit
                                                    exposure.\1\ Also
                                                    report measures for
                                                    EAD used for
                                                    regulatory capital
                                                    for these
                                                    transactions, the
                                                    notional value of
                                                    credit derivative
                                                    hedges purchased for
                                                    counterparty credit
                                                    risk protection,
                                                    and, for national
                                                    banks or Federal
                                                    savings associations
                                                    not using the
                                                    internal models
                                                    methodology in Sec.
                                                    3.132(d) , the
                                                    distribution of
                                                    current credit
                                                    exposure by types of
                                                    credit exposure.\2\
                                (c)..............  Notional amount of
                                                    purchased and sold
                                                    credit derivatives,
                                                    segregated between
                                                    use for the national
                                                    bank's or Federal
                                                    savings
                                                    association's own
                                                    credit portfolio and
                                                    for its
                                                    intermediation
                                                    activities,
                                                    including the
                                                    distribution of the
                                                    credit derivative
                                                    products used,
                                                    categorized further
                                                    by protection bought
                                                    and sold within each
                                                    product group.
                                (d)..............  The estimate of alpha
                                                    if the national bank
                                                    or Federal savings
                                                    association has
                                                    received supervisory
                                                    approval to estimate
                                                    alpha.
------------------------------------------------------------------------
\1\ Net unsecured credit exposure is the credit exposure after
  considering the benefits from legally enforceable netting agreements
  and collateral arrangements, without taking into account haircuts for
  price volatility, liquidity, etc.
\2\ 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.


[[Page 177]]


          Table 8 ToSec. 3.173--Credit Risk Mitigation \1 2\
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative disclosures.......  (a)..............  The general
                                                    qualitative
                                                    disclosure
                                                    requirement with
                                                    respect to credit
                                                    risk mitigation,
                                                    including:
                                                   (1) Policies and
                                                    processes for, and
                                                    an indication of the
                                                    extent to which the
                                                    national bank or
                                                    Federal savings
                                                    association uses, on-
                                                     or off-balance
                                                    sheet netting;
                                                   (2) Policies and
                                                    processes for
                                                    collateral valuation
                                                    and management;
                                                   (3) A description of
                                                    the main types of
                                                    collateral taken by
                                                    the national bank or
                                                    Federal savings
                                                    association;
                                                   (4) The main types of
                                                    guarantors/credit
                                                    derivative
                                                    counterparties and
                                                    their
                                                    creditworthiness;
                                                    and
                                                   (5) Information about
                                                    (market or credit)
                                                    risk concentrations
                                                    within the
                                                    mitigation taken.
Quantitative disclosures......  (b)..............  For each separately
                                                    disclosed portfolio,
                                                    the total exposure
                                                    (after, where
                                                    applicable, on- or
                                                    off-balance sheet
                                                    netting) that is
                                                    covered by
                                                    guarantees/credit
                                                    derivatives.
------------------------------------------------------------------------
\1\ At a minimum, a national bank or Federal savings association must
  provide the disclosures in Table 8 in relation to credit risk
  mitigation that has been recognized for the purposes of reducing
  capital requirements under this subpart. Where relevant, national
  banks or Federal savings associations are encouraged to give further
  information about mitigants that have not been recognized for that
  purpose.
\2\ Credit derivatives and other credit mitigation that are treated for
  the purposes of this subpart as synthetic securitization exposures
  should be excluded from the credit risk mitigation disclosures (in
  Table 8 toSec. 3.173) and included within those relating to
  securitization (in Table 9 toSec. 3.173).


                 Table 9 toSec. 3.173--Securitization
Qualitative disclosures.......  (a)..............  The general
                                                    qualitative
                                                    disclosure
                                                    requirement with
                                                    respect to
                                                    securitization
                                                    (including synthetic
                                                    securitizations),
                                                    including a
                                                    discussion of:
                                                   (1) The national
                                                    bank's or Federal
                                                    savings
                                                    association's
                                                    objectives for
                                                    securitizing assets,
                                                    including the extent
                                                    to which these
                                                    activities transfer
                                                    credit risk of the
                                                    underlying exposures
                                                    away from the
                                                    national bank or
                                                    Federal savings
                                                    association to other
                                                    entities and
                                                    including the type
                                                    of risks assumed and
                                                    retained with
                                                    resecuritization
                                                    activity; \1\
                                                   (2) The nature of the
                                                    risks (e.g.
                                                    liquidity risk)
                                                    inherent in the
                                                    securitized assets;
                                                   (3) The roles played
                                                    by the national bank
                                                    or Federal savings
                                                    association in the
                                                    securitization
                                                    process \2\ and an
                                                    indication of the
                                                    extent of the
                                                    national bank's or
                                                    Federal savings
                                                    association'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 national
                                                    bank's or Federal
                                                    savings
                                                    association's policy
                                                    for mitigating the
                                                    credit risk retained
                                                    through
                                                    securitization and
                                                    resecuritization
                                                    exposures; and
                                                   (6) The risk-based
                                                    capital approaches
                                                    that the national
                                                    bank or Federal
                                                    savings association
                                                    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 national
                                                    bank or Federal
                                                    savings association,
                                                    as sponsor, uses to
                                                    securitize third-
                                                    party exposures. The
                                                    national bank or
                                                    Federal savings
                                                    association must
                                                    indicate whether it
                                                    has exposure to
                                                    these SPEs, either
                                                    on- or off- balance
                                                    sheet; and
                                                   (2) Affiliated
                                                    entities:
                                                   (i) That the national
                                                    bank or Federal
                                                    savings association
                                                    manages or advises;
                                                    and
                                                   (ii) That invest
                                                    either in the
                                                    securitization
                                                    exposures that the
                                                    national bank or
                                                    Federal savings
                                                    association has
                                                    securitized or in
                                                    securitization SPEs
                                                    that the national
                                                    bank or Federal
                                                    savings association
                                                    sponsors.\3\

[[Page 178]]

 
                                (c)..............  Summary of the
                                                    national bank's or
                                                    Federal savings
                                                    association'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 and
                                                    inputs applied in
                                                    valuing retained or
                                                    purchased interests;
                                                   (4) Changes in
                                                    methods and key
                                                    assumptions and
                                                    inputs 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 E of
                                                    this part; and
                                                   (7) Policies for
                                                    recognizing
                                                    liabilities on the
                                                    balance sheet for
                                                    arrangements that
                                                    could require the
                                                    national bank or
                                                    Federal savings
                                                    association to
                                                    provide financial
                                                    support for
                                                    securitized assets.
                                (d)..............  An explanation of
                                                    significant changes
                                                    to any of the
                                                    quantitative
                                                    information set
                                                    forth below since
                                                    the last reporting
                                                    period.
Quantitative disclosures......  (e)..............  The total outstanding
                                                    exposures
                                                    securitized \4\ by
                                                    the national bank or
                                                    Federal savings
                                                    association in
                                                    securitizations that
                                                    meet the operational
                                                    criteria in Sec.
                                                    3.141 (categorized
                                                    into traditional/
                                                    synthetic), by
                                                    underlying exposure
                                                    type \5\ separately
                                                    for securitizations
                                                    of third-party
                                                    exposures for which
                                                    the bank acts only
                                                    as sponsor.
                                (f)..............  For exposures
                                                    securitized by the
                                                    national bank or
                                                    Federal savings
                                                    association in
                                                    securitizations that
                                                    meet the operational
                                                    criteria in Sec.
                                                    3.141:
                                                   (1) Amount of
                                                    securitized assets
                                                    that are impaired
                                                    \6\/past due
                                                    categorized by
                                                    exposure type; and
                                                   (2) Losses recognized
                                                    by the national bank
                                                    or Federal savings
                                                    association during
                                                    the current period
                                                    categorized by
                                                    exposure type.\7\
                                (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. SA, SFA, or
                                                    SSFA).
                                                   (2) Exposures that
                                                    have been deducted
                                                    entirely from tier 1
                                                    capital, CEIOs
                                                    deducted from total
                                                    capital (as
                                                    described in Sec.
                                                    3.42(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
                                                    asset 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
                                                    creditworthiness
                                                    categories or
                                                    guarantor name.
------------------------------------------------------------------------
\1\ The national bank or Federal savings association must describe the
  structure of resecuritizations in which it participates; this
  description must be provided for the main categories of
  resecuritization products in which the national bank or Federal
  savings association is active.
\2\ For example, these roles would include originator, investor,
  servicer, provider of credit enhancement, sponsor, liquidity provider,
  or swap provider.
\3\ For example, money market mutual funds should be listed
  individually, and personal and private trusts, should be noted
  collectively.
\4\ ``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.
\5\ A national bank or Federal savings association is required to
  disclose exposures regardless of whether there is a capital charge
  under this part.
\6\ A national bank or Federal savings association must include credit-
  related other than temporary impairment (OTTI).
\7\ 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.


[[Page 179]]


                Table 10 toSec. 3.173--Operational Risk
Qualitative disclosures.......  (a)..............  The general
                                                    qualitative
                                                    disclosure
                                                    requirement for
                                                    operational risk.
                                (b)..............  Description of the
                                                    AMA, including a
                                                    discussion of
                                                    relevant internal
                                                    and external factors
                                                    considered in the
                                                    national bank's or
                                                    Federal savings
                                                    association's
                                                    measurement
                                                    approach.
                                (c)..............  A description of the
                                                    use of insurance for
                                                    the purpose of
                                                    mitigating
                                                    operational risk.
------------------------------------------------------------------------


 Table 11 toSec. 3.173--Equities Not Subject to Subpart F of This Part
Qualitative disclosures.......  (a)..............  The general
                                                    qualitative
                                                    disclosure
                                                    requirement with
                                                    respect to the
                                                    equity risk of
                                                    equity holdings not
                                                    subject to subpart F
                                                    of this part,
                                                    including:
                                                   (1) Differentiation
                                                    between holdings on
                                                    which capital gains
                                                    are expected and
                                                    those held for 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
                                                    methodology and
                                                    valuation
                                                    methodologies used,
                                                    including key
                                                    assumptions and
                                                    practices affecting
                                                    valuation as well as
                                                    significant changes
                                                    in these practices.
Quantitative disclosures......  (b)..............  Carrying value on the
                                                    balance sheet of
                                                    equity investments,
                                                    as well as the fair
                                                    value of those
                                                    investments.
                                (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) \1\
                                                   (2) Total latent
                                                    revaluation gains
                                                    (losses) \2\
                                                   (3) Any amounts of
                                                    the above included
                                                    in tier 1 and/or
                                                    tier 2 capital.
                                (f)..............  Capital requirements
                                                    categorized by
                                                    appropriate equity
                                                    groupings,
                                                    consistent with the
                                                    national bank's or
                                                    Federal savings
                                                    association's
                                                    methodology, as well
                                                    as the aggregate
                                                    amounts and the type
                                                    of equity
                                                    investments subject
                                                    to any supervisory
                                                    transition regarding
                                                    total capital
                                                    requirements.\3\
------------------------------------------------------------------------
\1\ Unrealized gains (losses) recognized in the balance sheet but not
  through earnings.
\2\ Unrealized gains (losses) not recognized either in the balance sheet
  or through earnings.
\3\ This disclosure must include a breakdown of equities that are
  subject to the 0 percent, 20 percent, 100 percent, 300 percent, 400
  percent, and 600 percent risk weights, as applicable.


 Table 12 toSec. 3.173--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).
------------------------------------------------------------------------



Secs. 3.174-3.200  [Reserved]



               Subpart F_Risk-Weighted Assets_Market Risk

    Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted.



Sec. 3.201  Purpose, applicability, and reservation of authority.

    (a) Purpose. This subpart F establishes risk-based capital 
requirements for national banks or Federal savings associations with 
significant exposure to market risk, provides methods for these national 
banks or Federal savings associations to calculate their standardized 
measure for market risk and, if applicable, advanced measure for market 
risk, and establishes public disclosure requirements.
    (b) Applicability. (1) This subpart F applies to any national bank 
or Federal savings association with aggregate trading assets and trading 
liabilities (as reported in the national bank's or

[[Page 180]]

Federal savings association's most recent quarterly [regulatory 
report]), equal to:
    (i) 10 percent or more of quarter-end total assets as reported on 
the most recent quarterly [Call Report or FR Y-9C]; or
    (ii) $1 billion or more.
    (2) The OCC may apply this subpart to any national bank or Federal 
savings association if the OCC deems it necessary or appropriate because 
of the level of market risk of the national bank or Federal savings 
association or to ensure safe and sound banking practices.
    (3) The OCC may exclude a national bank or Federal savings 
association that meets the criteria of paragraph (b)(1) of this section 
from application of this subpart if the OCC determines that the 
exclusion is appropriate based on the level of market risk of the 
national bank or Federal savings association and is consistent with safe 
and sound banking practices.
    (c) Reservation of authority (1) The OCC may require a national bank 
or Federal savings association to hold an amount of capital greater than 
otherwise required under this subpart if the OCC determines that the 
national bank's or Federal savings association's capital requirement for 
market risk as calculated under this subpart is not commensurate with 
the market risk of the national bank's or Federal savings association's 
covered positions. In making determinations under paragraphs (c)(1) 
through (c)(3) of this section, the OCC will apply notice and response 
procedures generally in the same manner as the notice and response 
procedures set forth in 12 CFR 3.404.
    (2) If the OCC determines that the risk-based capital requirement 
calculated under this subpart by the national bank or Federal savings 
association for one or more covered positions or portfolios of covered 
positions is not commensurate with the risks associated with those 
positions or portfolios, the OCC may require the national bank or 
Federal savings association to assign a different risk-based capital 
requirement to the positions or portfolios that more accurately reflects 
the risk of the positions or portfolios.
    (3) The OCC may also require a national bank or Federal savings 
association to calculate risk-based capital requirements for specific 
positions or portfolios under this subpart, or under subpart D or 
subpart E of this part, as appropriate, to more accurately reflect the 
risks of the positions.
    (4) Nothing in this subpart limits the authority of the OCC under 
any other provision of law or regulation to take supervisory or 
enforcement action, including action to address unsafe or unsound 
practices or conditions, deficient capital levels, or violations of law.

[78 FR 62157, 62273, 62274, Oct. 11, 2013]



Sec. 3.202  Definitions.

    (a) Terms set forth in Sec. ???.2 and used in this subpart have the 
definitions assigned thereto in Sec. 3.2.
    (b) For the purposes of this subpart, the following terms are 
defined as follows:
    Backtesting means the comparison of a national bank's or Federal 
savings association's internal estimates with actual outcomes during a 
sample period not used in model development. For purposes of this 
subpart, backtesting is one form of out-of-sample testing.
    Commodity position means a position for which price risk arises from 
changes in the price of a commodity.
    Corporate debt position means a debt position that is an exposure to 
a company that is not a sovereign entity, the Bank for International 
Settlements, the European Central Bank, the European Commission, the 
International Monetary Fund, a multilateral development bank, a 
depository institution, a foreign bank, a credit union, a public sector 
entity, a GSE, or a securitization.
    Correlation trading position means:
    (1) A securitization position for which all or substantially all of 
the value of the underlying exposures is based on the credit quality of 
a single company for which a two-way market exists, or on commonly 
traded indices based on such exposures for which a two-way market exists 
on the indices; or
    (2) A position that is not a securitization position and that hedges

[[Page 181]]

a position described in paragraph (1) of this definition; and
    (3) A correlation trading position does not include:
    (i) A resecuritization position;
    (ii) A derivative of a securitization position that does not provide 
a pro rata share in the proceeds of a securitization tranche; or
    (iii) A securitization position for which the underlying assets or 
reference exposures are retail exposures, residential mortgage 
exposures, or commercial mortgage exposures.
    Covered position means the following positions:
    (1) A trading asset or trading liability (whether on- or off-balance 
sheet),\27\ as reported on Call Report, that meets the following 
conditions:
---------------------------------------------------------------------------

    \27\ Securities subject to repurchase and lending agreements are 
included as if they are still owned by the lender.
---------------------------------------------------------------------------

    (i) The position is a trading position or hedges another covered 
position; \28\ and
---------------------------------------------------------------------------

    \28\ A position that hedges a trading position must be within the 
scope of the bank's hedging strategy as described in paragraph (a)(2) of 
section 203 of this subpart.
---------------------------------------------------------------------------

    (ii) The position is free of any restrictive covenants on its 
tradability or the national bank or Federal savings association is able 
to hedge the material risk elements of the position in a two-way market;
    (2) A foreign exchange or commodity position, regardless of whether 
the position is a trading asset or trading liability (excluding any 
structural foreign currency positions that the national bank or Federal 
savings association chooses to exclude with prior supervisory approval); 
and
    (3) Notwithstanding paragraphs (1) and (2) of this definition, a 
covered position does not include:
    (i) An intangible asset, including any servicing asset;
    (ii) Any hedge of a trading position that the OCC determines to be 
outside the scope of the national bank's or Federal savings 
association's hedging strategy required in paragraph (a)(2) of 
Sec. 3.203;
    (iii) Any position that, in form or substance, acts as a liquidity 
facility that provides support to asset-backed commercial paper;
    (iv) A credit derivative the national bank or Federal savings 
association recognizes as a guarantee for risk-weighted asset amount 
calculation purposes under subpart D or subpart E of this part;
    (v) Any position that is recognized as a credit valuation adjustment 
hedge under Sec. 3.132(e)(5) or Sec. 3.132(e)(6), except as provided in 
Sec. 3.132(e)(6)(vii);
    (vi) Any equity position that is not publicly traded, other than a 
derivative that references a publicly traded equity and other than a 
position in an investment company as defined in and registered with the 
SEC under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), 
provided that all the underlying equities held by the investment company 
are publicly traded;
    (vii) Any equity position that is not publicly traded, other than a 
derivative that references a publicly traded equity and other than a 
position in an entity not domiciled in the United States (or a political 
subdivision thereof) that is supervised and regulated in a manner 
similar to entities described in paragraph (3)(vi) of this definition;
    (viii) Any position a national bank or Federal savings association 
holds with the intent to securitize; or
    (ix) Any direct real estate holding.
    Debt position means a covered position that is not a securitization 
position or a correlation trading position and that has a value that 
reacts primarily to changes in interest rates or credit spreads.
    Default by a sovereign entity has the same meaning as the term 
sovereign default under Sec. 3.2.
    Equity position means a covered position that is not a 
securitization position or a correlation trading position and that has a 
value that reacts primarily to changes in equity prices.
    Event risk means the risk of loss on equity or hybrid equity 
positions as a result of a financial event, such as the announcement or 
occurrence of a company merger, acquisition, spin-off, or dissolution.
    Foreign exchange position means a position for which price risk 
arises from changes in foreign exchange rates.
    General market risk means the risk of loss that could result from 
broad market movements, such as changes in the

[[Page 182]]

general level of interest rates, credit spreads, equity prices, foreign 
exchange rates, or commodity prices.
    Hedge means a position or positions that offset all, or 
substantially all, of one or more material risk factors of another 
position.
    Idiosyncratic risk means the risk of loss in the value of a position 
that arises from changes in risk factors unique to that position.
    Incremental risk means the default risk and credit migration risk of 
a position. Default risk means the risk of loss on a position that could 
result from the failure of an obligor to make timely payments of 
principal or interest on its debt obligation, and the risk of loss that 
could result from bankruptcy, insolvency, or similar proceeding. Credit 
migration risk means the price risk that arises from significant changes 
in the underlying credit quality of the position.
    Market risk means the risk of loss on a position that could result 
from movements in market prices.
    Resecuritization position means a covered position that is:
    (1) An on- or off-balance sheet exposure to a resecuritization; or
    (2) An exposure that directly or indirectly references a 
resecuritization exposure in paragraph (1) of this definition.
    Securitization means a transaction in which:
    (1) All or a portion of the credit risk of one or more underlying 
exposures is transferred to one or more third parties;
    (2) The credit risk associated with the underlying exposures has 
been separated into at least two tranches that reflect different levels 
of seniority;
    (3) Performance of the securitization exposures depends upon the 
performance of the underlying exposures;
    (4) All or substantially all of the underlying exposures are 
financial exposures (such as loans, commitments, credit derivatives, 
guarantees, receivables, asset-backed securities, mortgage-backed 
securities, other debt securities, or equity securities);
    (5) For non-synthetic securitizations, the underlying exposures are 
not owned by an operating company;
    (6) The underlying exposures are not owned by a small business 
investment company described in section 302 of the Small Business 
Investment Act;
    (7) The underlying exposures are not owned by a firm an investment 
in which qualifies as a community development investment under section 
24(Eleventh) of the National Bank Act;
    (8) The OCC may determine that a transaction in which the underlying 
exposures are owned by an investment firm that exercises substantially 
unfettered control over the size and composition of its assets, 
liabilities, and off-balance sheet exposures is not a securitization 
based on the transaction's leverage, risk profile, or economic 
substance;
    (9) The OCC may deem an exposure to a transaction that meets the 
definition of a securitization, notwithstanding paragraph (5), (6), or 
(7) of this definition, to be a securitization based on the 
transaction's leverage, risk profile, or economic substance; and
    (10) The transaction is not:
    (i) An investment fund;
    (ii) A collective investment fund (as defined in [12 CFR 208.34 
(Board), 12 CFR 9.18 (OCC)]);
    (iii) An employee benefit plan as defined in paragraphs (3) and (32) 
of section 3 of ERISA, a ``governmental plan'' (as defined in 29 U.S.C. 
1002(32)) that complies with the tax deferral qualification requirements 
provided in the Internal Revenue Code, or any similar employee benefit 
plan established under the laws of a foreign jurisdiction; or
    (iv) Registered with the SEC under the Investment Company Act of 
1940 (15 U.S.C. 80a-1 et seq.) or foreign equivalents thereof.
    Securitization position means a covered position that is:
    (1) An on-balance sheet or off-balance sheet credit exposure 
(including credit-enhancing representations and warranties) that arises 
from a securitization (including a resecuritization); or
    (2) An exposure that directly or indirectly references a 
securitization exposure described in paragraph (1) of this definition.
    Sovereign debt position means a direct exposure to a sovereign 
entity.

[[Page 183]]

    Specific risk means the risk of loss on a position that could result 
from factors other than broad market movements and includes event risk, 
default risk, and idiosyncratic risk.
    Structural position in a foreign currency means a position that is 
not a trading position and that is:
    (1) Subordinated debt, equity, or minority interest in a 
consolidated subsidiary that is denominated in a foreign currency;
    (2) Capital assigned to foreign branches that is denominated in a 
foreign currency;
    (3) A position related to an unconsolidated subsidiary or another 
item that is denominated in a foreign currency and that is deducted from 
the national bank's or Federal savings association's tier 1 or tier 2 
capital; or
    (4) A position designed to hedge a national bank's or Federal 
savings association's capital ratios or earnings against the effect on 
paragraphs (1), (2), or (3) of this definition of adverse exchange rate 
movements.
    Term repo-style transaction means a repo-style transaction that has 
an original maturity in excess of one business day.
    Trading position means a position that is held by the national bank 
or Federal savings association for the purpose of short-term resale or 
with the intent of benefiting from actual or expected short-term price 
movements, or to lock in arbitrage profits.
    Two-way market means 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.
    Value-at-Risk (VaR) means the estimate of the maximum amount that 
the value of one or more positions could decline due to market price or 
rate movements during a fixed holding period within a stated confidence 
interval.



Sec. 3.203  Requirements for application of this subpart F.

    (a) Trading positions--(1) Identification of trading positions. A 
national bank or Federal savings association must have clearly defined 
policies and procedures for determining which of its trading assets and 
trading liabilities are trading positions and which of its trading 
positions are correlation trading positions. These policies and 
procedures must take into account:
    (i) The extent to which a position, or a hedge of its material 
risks, can be marked-to-market daily by reference to a two-way market; 
and
    (ii) Possible impairments to the liquidity of a position or its 
hedge.
    (2) Trading and hedging strategies. A national bank or Federal 
savings association must have clearly defined trading and hedging 
strategies for its trading positions that are approved by senior 
management of the national bank or Federal savings association.
    (i) The trading strategy must articulate the expected holding period 
of, and the market risk associated with, each portfolio of trading 
positions.
    (ii) The hedging strategy must articulate for each portfolio of 
trading positions the level of market risk the national bank or Federal 
savings association is willing to accept and must detail the 
instruments, techniques, and strategies the national bank or Federal 
savings association will use to hedge the risk of the portfolio.
    (b) Management of covered positions--(1) Active management. A 
national bank or Federal savings association must have clearly defined 
policies and procedures for actively managing all covered positions. At 
a minimum, these policies and procedures must require:
    (i) Marking positions to market or to model on a daily basis;
    (ii) Daily assessment of the national bank's or Federal savings 
association's ability to hedge position and portfolio risks, and of the 
extent of market liquidity;
    (iii) Establishment and daily monitoring of limits on positions by a 
risk control unit independent of the trading business unit;
    (iv) Daily monitoring by senior management of information described 
in

[[Page 184]]

paragraphs (b)(1)(i) through (b)(1)(iii) of this section;
    (v) At least annual reassessment of established limits on positions 
by senior management; and
    (vi) At least annual assessments by qualified personnel of the 
quality of market inputs to the valuation process, the soundness of key 
assumptions, the reliability of parameter estimation in pricing models, 
and the stability and accuracy of model calibration under alternative 
market scenarios.
    (2) Valuation of covered positions. The national bank or Federal 
savings association must have a process for prudent valuation of its 
covered positions that includes policies and procedures on the valuation 
of positions, marking positions to market or to model, independent price 
verification, and valuation adjustments or reserves. The valuation 
process must consider, as appropriate, unearned credit spreads, close-
out costs, early termination costs, investing and funding costs, 
liquidity, and model risk.
    (c) Requirements for internal models. (1) A national bank or Federal 
savings association must obtain the prior written approval of the OCC 
before using any internal model to calculate its risk-based capital 
requirement under this subpart.
    (2) A national bank or Federal savings association must meet all of 
the requirements of this section on an ongoing basis. The national bank 
or Federal savings association must promptly notify the OCC when:
    (i) The national bank or Federal savings association plans to extend 
the use of a model that the OCC has approved under this subpart to an 
additional business line or product type;
    (ii) The national bank or Federal savings association makes any 
change to an internal model approved by the OCC under this subpart that 
would result in a material change in the national bank's or Federal 
savings association's risk-weighted asset amount for a portfolio of 
covered positions; or
    (iii) The national bank or Federal savings association makes any 
material change to its modeling assumptions.
    (3) The OCC may rescind its approval of the use of any internal 
model (in whole or in part) or of the determination of the approach 
under Sec. 3.209(a)(2)(ii) for a national bank's or Federal savings 
association's modeled correlation trading positions and determine an 
appropriate capital requirement for the covered positions to which the 
model would apply, if the OCC determines that the model no longer 
complies with this subpart or fails to reflect accurately the risks of 
the national bank's or Federal savings association's covered positions.
    (4) The national bank or Federal savings association must 
periodically, but no less frequently than annually, review its internal 
models in light of developments in financial markets and modeling 
technologies, and enhance those models as appropriate to ensure that 
they continue to meet the OCC's standards for model approval and employ 
risk measurement methodologies that are most appropriate for the 
national bank's or Federal savings association's covered positions.
    (5) The national bank or Federal savings association must 
incorporate its internal models into its risk management process and 
integrate the internal models used for calculating its VaR-based measure 
into its daily risk management process.
    (6) The level of sophistication of a national bank's or Federal 
savings association's internal models must be commensurate with the 
complexity and amount of its covered positions. A national bank's or 
Federal savings association's internal models may use any of the 
generally accepted approaches, including but not limited to variance-
covariance models, historical simulations, or Monte Carlo simulations, 
to measure market risk.
    (7) The national bank's or Federal savings association's internal 
models must properly measure all the material risks in the covered 
positions to which they are applied.
    (8) The national bank's or Federal savings association's internal 
models must conservatively assess the risks arising from less liquid 
positions and positions with limited price transparency under realistic 
market scenarios.
    (9) The national bank or Federal savings association must have a 
rigorous

[[Page 185]]

and well-defined process for re-estimating, re-evaluating, and updating 
its internal models to ensure continued applicability and relevance.
    (10) If a national bank or Federal savings association uses internal 
models to measure specific risk, the internal models must also satisfy 
the requirements in paragraph (b)(1) of Sec. 3.207.
    (d) Control, oversight, and validation mechanisms. (1) The national 
bank or Federal savings association must have a risk control unit that 
reports directly to senior management and is independent from the 
business trading units.
    (2) The national bank or Federal savings association must validate 
its internal models initially and on an ongoing basis. The national 
bank's or Federal savings association's validation process must be 
independent of the internal models' development, implementation, and 
operation, or the validation process must be subjected to an independent 
review of its adequacy and effectiveness. Validation must include:
    (i) An evaluation of the conceptual soundness of (including 
developmental evidence supporting) the internal models;
    (ii) An ongoing monitoring process that includes verification of 
processes and the comparison of the national bank's or Federal savings 
association's model outputs with relevant internal and external data 
sources or estimation techniques; and
    (iii) An outcomes analysis process that includes backtesting. For 
internal models used to calculate the VaR-based measure, this process 
must include a comparison of the changes in the national bank's or 
Federal savings association's portfolio value that would have occurred 
were end-of-day positions to remain unchanged (therefore, excluding 
fees, commissions, reserves, net interest income, and intraday trading) 
with VaR-based measures during a sample period not used in model 
development.
    (3) The national bank or Federal savings association must stress 
test the market risk of its covered positions at a frequency appropriate 
to each portfolio, and in no case less frequently than quarterly. The 
stress tests must take into account concentration risk (including but 
not limited to concentrations in single issuers, industries, sectors, or 
markets), illiquidity under stressed market conditions, and risks 
arising from the national bank's or Federal savings association's 
trading activities that may not be adequately captured in its internal 
models.
    (4) The national bank or Federal savings association must have an 
internal audit function independent of business-line management that at 
least annually assesses the effectiveness of the controls supporting the 
national bank's or Federal savings association's market risk measurement 
systems, including the activities of the business trading units and 
independent risk control unit, compliance with policies and procedures, 
and calculation of the national bank's or Federal savings association's 
measures for market risk under this subpart. At least annually, the 
internal audit function must report its findings to the national bank's 
or Federal savings association's board of directors (or a committee 
thereof).
    (e) Internal assessment of capital adequacy. The national bank or 
Federal savings association must have a rigorous process for assessing 
its overall capital adequacy in relation to its market risk. The 
assessment must take into account risks that may not be captured fully 
in the VaR-based measure, including concentration and liquidity risk 
under stressed market conditions.
    (f) Documentation. The national bank or Federal savings association 
must adequately document all material aspects of its internal models, 
management and valuation of covered positions, control, oversight, 
validation and review processes and results, and internal assessment of 
capital adequacy.



Sec. 3.204  Measure for market risk.

    (a) General requirement. (1) A national bank or Federal savings 
association must calculate its standardized measure for market risk by 
following the steps described in paragraph (a)(2) of this section. An 
advanced approaches

[[Page 186]]

national bank or Federal savings association also must calculate an 
advanced measure for market risk by following the steps in paragraph 
(a)(2) of this section.
    (2) Measure for market risk. A national bank or Federal savings 
association must calculate the standardized measure for market risk, 
which equals the sum of the VaR-based capital requirement, stressed VaR-
based capital requirement, specific risk add-ons, incremental risk 
capital requirement, comprehensive risk capital requirement, and capital 
requirement for de minimis exposures all as defined under this paragraph 
(a)(2), (except, that the national bank or Federal savings association 
may not use the SFA in section 210(b)(2)(vii)(B) of this subpart for 
purposes of this calculation)[, plus any additional capital requirement 
established by the OCC]. An advanced approaches national bank or Federal 
savings association that has completed the parallel run process and that 
has received notifications from the OCC pursuant to Sec. 3.121(d) also 
must calculate the advanced measure for market risk, which equals the 
sum of the VaR-based capital requirement, stressed VaR-based capital 
requirement, specific risk add-ons, incremental risk capital 
requirement, comprehensive risk capital requirement, and capital 
requirement for de minimis exposures as defined under this paragraph 
(a)(2) [, plus any additional capital requirement established by the 
OCC].
    (i) VaR-based capital requirement. A national bank's or Federal 
savings association's VaR-based capital requirement equals the greater 
of:
    (A) The previous day's VaR-based measure as calculated under 
Sec. 3.205; or
    (B) The average of the daily VaR-based measures as calculated under 
Sec. 3.205 for each of the preceding 60 business days multiplied by 
three, except as provided in paragraph (b) of this section.
    (ii) Stressed VaR-based capital requirement. A national bank's or 
Federal savings association's stressed VaR-based capital requirement 
equals the greater of:
    (A) The most recent stressed VaR-based measure as calculated under 
Sec. 3.206; or
    (B) The average of the stressed VaR-based measures as calculated 
under Sec. 3.206 for each of the preceding 12 weeks multiplied by three, 
except as provided in paragraph (b) of this section.
    (iii) Specific risk add-ons. A national bank's or Federal savings 
association's specific risk add-ons equal any specific risk add-ons that 
are required under Sec. 3.207 and are calculated in accordance with 
Sec. 3.210.
    (iv) Incremental risk capital requirement. A national bank's or 
Federal savings association's incremental risk capital requirement 
equals any incremental risk capital requirement as calculated under 
section 208 of this subpart.
    (v) Comprehensive risk capital requirement. A national bank's or 
Federal savings association's comprehensive risk capital requirement 
equals any comprehensive risk capital requirement as calculated under 
section 209 of this subpart.
    (vi) Capital requirement for de minimis exposures. A national bank's 
or Federal savings association's capital requirement for de minimis 
exposures equals:
    (A) The absolute value of the fair value of those de minimis 
exposures that are not captured in the national bank's or Federal 
savings association's VaR-based measure or under paragraph (a)(2)(vi)(B) 
of this section; and
    (B) With the prior written approval of the OCC, the capital 
requirement for any de minimis exposures using alternative techniques 
that appropriately measure the market risk associated with those 
exposures.
    (b) Backtesting. A national bank or Federal savings association must 
compare each of its most recent 250 business days' trading losses 
(excluding fees, commissions, reserves, net interest income, and 
intraday trading) with the corresponding daily VaR-based measures 
calibrated to a one-day holding period and at a one-tail, 99.0 percent 
confidence level. A national bank or Federal savings association must 
begin backtesting as required by this paragraph (b) no later than one 
year after the later of January 1, 2014 and

[[Page 187]]

the date on which the national bank or Federal savings association 
becomes subject to this subpart. In the interim, consistent with safety 
and soundness principles, a national bank or Federal savings association 
subject to this subpart as of January 1, 2014 should continue to follow 
backtesting procedures in accordance with the OCC's supervisory 
expectations.
    (1) Once each quarter, the national bank or Federal savings 
association must identify the number of exceptions (that is, the number 
of business days for which the actual daily net trading loss, if any, 
exceeds the corresponding daily VaR-based measure) that have occurred 
over the preceding 250 business days.
    (2) A national bank or Federal savings association must use the 
multiplication factor in Table 1 to Sec. 3.204 that corresponds to the 
number of exceptions identified in paragraph (b)(1) of this section to 
determine its VaR-based capital requirement for market risk under 
paragraph (a)(2)(i) of this section and to determine its stressed VaR-
based capital requirement for market risk under paragraph (a)(2)(ii) of 
this section until it obtains the next quarter's backtesting results, 
unless the OCC notifies the national bank or Federal savings association 
in writing that a different adjustment or other action is appropriate.

   Table 1 toSec. 3.204--Multiplication Factors Based on Results of
                               Backtesting
------------------------------------------------------------------------
                                                          Multiplication
                  Number of exceptions                        factor
------------------------------------------------------------------------
4 or fewer..............................................            3.00
5.......................................................            3.40
6.......................................................            3.50
7.......................................................            3.65
8.......................................................            3.75
9.......................................................            3.85
10 or more..............................................            4.00
------------------------------------------------------------------------



Sec. 3.205  VaR-based measure.

    (a) General requirement. A national bank or Federal savings 
association must use one or more internal models to calculate daily a 
VaR-based measure of the general market risk of all covered positions. 
The daily VaR-based measure also may reflect the national bank's or 
Federal savings association's specific risk for one or more portfolios 
of debt and equity positions, if the internal models meet the 
requirements of paragraph (b)(1) of Sec. 3.207. The daily VaR-based 
measure must also reflect the national bank's or Federal savings 
association's specific risk for any portfolio of correlation trading 
positions that is modeled under Sec. 3.209. A national bank or Federal 
savings association may elect to include term repo-style transactions in 
its VaR-based measure, provided that the national bank or Federal 
savings association includes all such term repo-style transactions 
consistently over time.
    (1) The national bank's or Federal savings association's internal 
models for calculating its VaR-based measure must use risk factors 
sufficient to measure the market risk inherent in all covered positions. 
The market risk categories must include, as appropriate, interest rate 
risk, credit spread risk, equity price risk, foreign exchange risk, and 
commodity price risk. For material positions in the major currencies and 
markets, modeling techniques must incorporate enough segments of the 
yield curve--in no case less than six--to capture differences in 
volatility and less than perfect correlation of rates along the yield 
curve.
    (2) The VaR-based measure may incorporate empirical correlations 
within and across risk categories, provided the national bank or Federal 
savings association validates and demonstrates the reasonableness of its 
process for measuring correlations. If the VaR-based measure does not 
incorporate empirical correlations across risk categories, the national 
bank or Federal savings association must add the separate measures from 
its internal models used to calculate the VaR-based measure for the 
appropriate market risk categories (interest rate risk, credit spread 
risk, equity price risk, foreign exchange rate risk, and/or commodity 
price risk) to determine its aggregate VaR-based measure.
    (3) The VaR-based measure must include the risks arising from the 
nonlinear price characteristics of options positions or positions with 
embedded optionality and the sensitivity of the fair value of the 
positions to changes in the volatility of the underlying rates, prices, 
or other material risk factors. A

[[Page 188]]

national bank or Federal savings association with a large or complex 
options portfolio must measure the volatility of options positions or 
positions with embedded optionality by different maturities and/or 
strike prices, where material.
    (4) The national bank or Federal savings association must be able to 
justify to the satisfaction of the OCC the omission of any risk factors 
from the calculation of its VaR-based measure that the national bank or 
Federal savings association uses in its pricing models.
    (5) The national bank or Federal savings association must 
demonstrate to the satisfaction of the OCC the appropriateness of any 
proxies used to capture the risks of the national bank's or Federal 
savings association's actual positions for which such proxies are used.
    (b) Quantitative requirements for VaR-based measure. (1) The VaR-
based measure must be calculated on a daily basis using a one-tail, 99.0 
percent confidence level, and a holding period equivalent to a 10-
business-day movement in underlying risk factors, such as rates, 
spreads, and prices. To calculate VaR-based measures using a 10-
business-day holding period, the national bank or Federal savings 
association may calculate 10-business-day measures directly or may 
convert VaR-based measures using holding periods other than 10 business 
days to the equivalent of a 10-business-day holding period. A national 
bank or Federal savings association that converts its VaR-based measure 
in such a manner must be able to justify the reasonableness of its 
approach to the satisfaction of the OCC.
    (2) The VaR-based measure must be based on a historical observation 
period of at least one year. Data used to determine the VaR-based 
measure must be relevant to the national bank's or Federal savings 
association's actual exposures and of sufficient quality to support the 
calculation of risk-based capital requirements. The national bank or 
Federal savings association must update data sets at least monthly or 
more frequently as changes in market conditions or portfolio composition 
warrant. For a national bank or Federal savings association that uses a 
weighting scheme or other method for the historical observation period, 
the national bank or Federal savings association must either:
    (i) Use an effective observation period of at least one year in 
which the average time lag of the observations is at least six months; 
or
    (ii) Demonstrate to the OCC that its weighting scheme is more 
effective than a weighting scheme with an average time lag of at least 
six months representing the volatility of the national bank's or Federal 
savings association's trading portfolio over a full business cycle. A 
national bank or Federal savings association using this option must 
update its data more frequently than monthly and in a manner appropriate 
for the type of weighting scheme.
    (c) A national bank or Federal savings association must divide its 
portfolio into a number of significant subportfolios approved by the OCC 
for subportfolio backtesting purposes. These subportfolios must be 
sufficient to allow the national bank or Federal savings association and 
the OCC to assess the adequacy of the VaR model at the risk factor 
level; the OCC will evaluate the appropriateness of these subportfolios 
relative to the value and composition of the national bank's or Federal 
savings association's covered positions. The national bank or Federal 
savings association must retain and make available to the OCC the 
following information for each subportfolio for each business day over 
the previous two years (500 business days), with no more than a 60-day 
lag:
    (1) A daily VaR-based measure for the subportfolio calibrated to a 
one-tail, 99.0 percent confidence level;
    (2) The daily profit or loss for the subportfolio (that is, the net 
change in price of the positions held in the portfolio at the end of the 
previous business day); and
    (3) The p-value of the profit or loss on each day (that is, the 
probability of observing a profit that is less than, or a loss that is 
greater than, the amount reported for purposes of paragraph (c)(2) of 
this section based on the model used to calculate the VaR-based measure 
described in paragraph (c)(1) of this section).

[[Page 189]]



Sec. 3.206  Stressed VaR-based measure.

    (a) General requirement. At least weekly, a national bank or Federal 
savings association must use the same internal model(s) used to 
calculate its VaR-based measure to calculate a stressed VaR-based 
measure.
    (b) Quantitative requirements for stressed VaR-based measure. (1) A 
national bank or Federal savings association must calculate a stressed 
VaR-based measure for its covered positions using the same model(s) used 
to calculate the VaR-based measure, subject to the same confidence level 
and holding period applicable to the VaR-based measure under Sec. 3.205, 
but with model inputs calibrated to historical data from a continuous 
12-month period that reflects a period of significant financial stress 
appropriate to the national bank's or Federal savings association's 
current portfolio.
    (2) The stressed VaR-based measure must be calculated at least 
weekly and be no less than the national bank's or Federal savings 
association's VaR-based measure.
    (3) A national bank or Federal savings association must have 
policies and procedures that describe how it determines the period of 
significant financial stress used to calculate the national bank's or 
Federal savings association's stressed VaR-based measure under this 
section and must be able to provide empirical support for the period 
used. The national bank or Federal savings association must obtain the 
prior approval of the OCC for, and notify the OCC if the national bank 
or Federal savings association makes any material changes to, these 
policies and procedures. The policies and procedures must address:
    (i) How the national bank or Federal savings association links the 
period of significant financial stress used to calculate the stressed 
VaR-based measure to the composition and directional bias of its current 
portfolio; and
    (ii) The national bank's or Federal savings association's process 
for selecting, reviewing, and updating the period of significant 
financial stress used to calculate the stressed VaR-based measure and 
for monitoring the appropriateness of the period to the national bank's 
or Federal savings association's current portfolio.
    (4) Nothing in this section prevents the OCC from requiring a 
national bank or Federal savings association to use a different period 
of significant financial stress in the calculation of the stressed VaR-
based measure.



Sec. 3.207  Specific risk.

    (a) General requirement. A national bank or Federal savings 
association must use one of the methods in this section to measure the 
specific risk for each of its debt, equity, and securitization positions 
with specific risk.
    (b) Modeled specific risk. A national bank or Federal savings 
association may use models to measure the specific risk of covered 
positions as provided in paragraph (a) of section 205 of this subpart 
(therefore, excluding securitization positions that are not modeled 
under section 209 of this subpart). A national bank or Federal savings 
association must use models to measure the specific risk of correlation 
trading positions that are modeled under Sec. 3.209.
    (1) Requirements for specific risk modeling. (i) If a national bank 
or Federal savings association uses internal models to measure the 
specific risk of a portfolio, the internal models must:
    (A) Explain the historical price variation in the portfolio;
    (B) Be responsive to changes in market conditions;
    (C) Be robust to an adverse environment, including signaling rising 
risk in an adverse environment; and
    (D) Capture all material components of specific risk for the debt 
and equity positions in the portfolio. Specifically, the internal models 
must:
    (1) Capture event risk and idiosyncratic risk; and
    (2) Capture and demonstrate sensitivity to material differences 
between positions that are similar but not identical and to changes in 
portfolio composition and concentrations.
    (ii) If a national bank or Federal savings association calculates an 
incremental risk measure for a portfolio of debt or equity positions 
under section 208 of this subpart, the national bank or Federal savings 
association is not

[[Page 190]]

required to capture default and credit migration risks in its internal 
models used to measure the specific risk of those portfolios.
    (2) Specific risk fully modeled for one or more portfolios. If the 
national bank's or Federal savings association's VaR-based measure 
captures all material aspects of specific risk for one or more of its 
portfolios of debt, equity, or correlation trading positions, the 
national bank or Federal savings association has no specific risk add-on 
for those portfolios for purposes of paragraph (a)(2)(iii) of 
Sec. 3.204.
    (c) Specific risk not modeled. (1) If the national bank's or Federal 
savings association's VaR-based measure does not capture all material 
aspects of specific risk for a portfolio of debt, equity, or correlation 
trading positions, the national bank or Federal savings association must 
calculate a specific-risk add-on for the portfolio under the 
standardized measurement method as described in Sec. 3.210.
    (2) A national bank or Federal savings association must calculate a 
specific risk add-on under the standardized measurement method as 
described in Sec. 3.210 for all of its securitization positions that are 
not modeled under Sec. 3.209.



Sec. 3.208  Incremental risk.

    (a) General requirement. A national bank or Federal savings 
association that measures the specific risk of a portfolio of debt 
positions under Sec. 3.207(b) using internal models must calculate at 
least weekly an incremental risk measure for that portfolio according to 
the requirements in this section. The incremental risk measure is the 
national bank's or Federal savings association's measure of potential 
losses due to incremental risk over a one-year time horizon at a one-
tail, 99.9 percent confidence level, either under the assumption of a 
constant level of risk, or under the assumption of constant positions. 
With the prior approval of the OCC, a national bank or Federal savings 
association may choose to include portfolios of equity positions in its 
incremental risk model, provided that it consistently includes such 
equity positions in a manner that is consistent with how the national 
bank or Federal savings association internally measures and manages the 
incremental risk of such positions at the portfolio level. If equity 
positions are included in the model, for modeling purposes default is 
considered to have occurred upon the default of any debt of the issuer 
of the equity position. A national bank or Federal savings association 
may not include correlation trading positions or securitization 
positions in its incremental risk measure.
    (b) Requirements for incremental risk modeling. For purposes of 
calculating the incremental risk measure, the incremental risk model 
must:
    (1) Measure incremental risk over a one-year time horizon and at a 
one-tail, 99.9 percent confidence level, either under the assumption of 
a constant level of risk, or under the assumption of constant positions.
    (i) A constant level of risk assumption means that the national bank 
or Federal savings association rebalances, or rolls over, its trading 
positions at the beginning of each liquidity horizon over the one-year 
horizon in a manner that maintains the national bank's or Federal 
savings association's initial risk level. The national bank or Federal 
savings association must determine the frequency of rebalancing in a 
manner consistent with the liquidity horizons of the positions in the 
portfolio. The liquidity horizon of a position or set of positions is 
the time required for a national bank or Federal savings association to 
reduce its exposure to, or hedge all of its material risks of, the 
position(s) in a stressed market. The liquidity horizon for a position 
or set of positions may not be less than the shorter of three months or 
the contractual maturity of the position.
    (ii) A constant position assumption means that the national bank or 
Federal savings association maintains the same set of positions 
throughout the one-year horizon. If a national bank or Federal savings 
association uses this assumption, it must do so consistently across all 
portfolios.
    (iii) A national bank's or Federal savings association's selection 
of a constant position or a constant risk assumption must be consistent 
between

[[Page 191]]

the national bank's or Federal savings association's incremental risk 
model and its comprehensive risk model described in section 209 of this 
subpart, if applicable.
    (iv) A national bank's or Federal savings association's treatment of 
liquidity horizons must be consistent between the national bank's or 
Federal savings association's incremental risk model and its 
comprehensive risk model described in section 209, if applicable.
    (2) Recognize the impact of correlations between default and 
migration events among obligors.
    (3) Reflect the effect of issuer and market concentrations, as well 
as concentrations that can arise within and across product classes 
during stressed conditions.
    (4) Reflect netting only of long and short positions that reference 
the same financial instrument.
    (5) Reflect any material mismatch between a position and its hedge.
    (6) Recognize the effect that liquidity horizons have on dynamic 
hedging strategies. In such cases, a national bank or Federal savings 
association must:
    (i) Choose to model the rebalancing of the hedge consistently over 
the relevant set of trading positions;
    (ii) Demonstrate that the inclusion of rebalancing results in a more 
appropriate risk measurement;
    (iii) Demonstrate that the market for the hedge is sufficiently 
liquid to permit rebalancing during periods of stress; and
    (iv) Capture in the incremental risk model any residual risks 
arising from such hedging strategies.
    (7) Reflect the nonlinear impact of options and other positions with 
material nonlinear behavior with respect to default and migration 
changes.
    (8) Maintain consistency with the national bank's or Federal savings 
association's internal risk management methodologies for identifying, 
measuring, and managing risk.
    (c) Calculation of incremental risk capital requirement. The 
incremental risk capital requirement is the greater of:
    (1) The average of the incremental risk measures over the previous 
12 weeks; or
    (2) The most recent incremental risk measure.



Sec. 3.209  Comprehensive risk.

    (a) General requirement. (1) Subject to the prior approval of the 
OCC, a national bank or Federal savings association may use the method 
in this section to measure comprehensive risk, that is, all price risk, 
for one or more portfolios of correlation trading positions.
    (2) A national bank or Federal savings association that measures the 
price risk of a portfolio of correlation trading positions using 
internal models must calculate at least weekly a comprehensive risk 
measure that captures all price risk according to the requirements of 
this section. The comprehensive risk measure is either:
    (i) The sum of:
    (A) The national bank's or Federal savings association's modeled 
measure of all price risk determined according to the requirements in 
paragraph (b) of this section; and
    (B) A surcharge for the national bank's or Federal savings 
association's modeled correlation trading positions equal to the total 
specific risk add-on for such positions as calculated under section 210 
of this subpart multiplied by 8.0 percent; or
    (ii) With approval of the OCC and provided the national bank or 
Federal savings association has met the requirements of this section for 
a period of at least one year and can demonstrate the effectiveness of 
the model through the results of ongoing model validation efforts 
including robust benchmarking, the greater of:
    (A) The national bank's or Federal savings association's modeled 
measure of all price risk determined according to the requirements in 
paragraph (b) of this section; or
    (B) The total specific risk add-on that would apply to the bank's 
modeled correlation trading positions as calculated under section 210 of 
this subpart multiplied by 8.0 percent.
    (b) Requirements for modeling all price risk. If a national bank or 
Federal savings association uses an internal model to measure the price 
risk of a portfolio of correlation trading positions:

[[Page 192]]

    (1) The internal model must measure comprehensive risk over a one-
year time horizon at a one-tail, 99.9 percent confidence level, either 
under the assumption of a constant level of risk, or under the 
assumption of constant positions.
    (2) The model must capture all material price risk, including but 
not limited to the following:
    (i) The risks associated with the contractual structure of cash 
flows of the position, its issuer, and its underlying exposures;
    (ii) Credit spread risk, including nonlinear price risks;
    (iii) The volatility of implied correlations, including nonlinear 
price risks such as the cross-effect between spreads and correlations;
    (iv) Basis risk;
    (v) Recovery rate volatility as it relates to the propensity for 
recovery rates to affect tranche prices; and
    (vi) To the extent the comprehensive risk measure incorporates the 
benefits of dynamic hedging, the static nature of the hedge over the 
liquidity horizon must be recognized. In such cases, a national bank or 
Federal savings association must:
    (A) Choose to model the rebalancing of the hedge consistently over 
the relevant set of trading positions;
    (B) Demonstrate that the inclusion of rebalancing results in a more 
appropriate risk measurement;
    (C) Demonstrate that the market for the hedge is sufficiently liquid 
to permit rebalancing during periods of stress; and
    (D) Capture in the comprehensive risk model any residual risks 
arising from such hedging strategies;
    (3) The national bank or Federal savings association must use market 
data that are relevant in representing the risk profile of the national 
bank's or Federal savings association's correlation trading positions in 
order to ensure that the national bank or Federal savings association 
fully captures the material risks of the correlation trading positions 
in its comprehensive risk measure in accordance with this section; and
    (4) The national bank or Federal savings association must be able to 
demonstrate that its model is an appropriate representation of 
comprehensive risk in light of the historical price variation of its 
correlation trading positions.
    (c) Requirements for stress testing. (1) A national bank or Federal 
savings association must at least weekly apply specific, supervisory 
stress scenarios to its portfolio of correlation trading positions that 
capture changes in:
    (i) Default rates;
    (ii) Recovery rates;
    (iii) Credit spreads;
    (iv) Correlations of underlying exposures; and
    (v) Correlations of a correlation trading position and its hedge.
    (2) Other requirements. (i) A national bank or Federal savings 
association must retain and make available to the OCC the results of the 
supervisory stress testing, including comparisons with the capital 
requirements generated by the national bank's or Federal savings 
association's comprehensive risk model.
    (ii) A national bank or Federal savings association must report to 
the OCC promptly any instances where the stress tests indicate any 
material deficiencies in the comprehensive risk model.
    (d) Calculation of comprehensive risk capital requirement. The 
comprehensive risk capital requirement is the greater of:
    (1) The average of the comprehensive risk measures over the previous 
12 weeks; or
    (2) The most recent comprehensive risk measure.



Sec. 3.210  Standardized measurement method for specific risk

    (a) General requirement. A national bank or Federal savings 
association must calculate a total specific risk add-on for each 
portfolio of debt and equity positions for which the national bank's or 
Federal savings association's VaR-based measure does not capture all 
material aspects of specific risk and for all securitization positions 
that are not modeled under Sec. 3.209. A national bank or Federal 
savings association must calculate each specific risk add-on in 
accordance with the requirements of this section. Notwithstanding any 
other definition or requirement in

[[Page 193]]

this subpart, a position that would have qualified as a debt position or 
an equity position but for the fact that it qualifies as a correlation 
trading position under paragraph (2) of the definition of correlation 
trading position in Sec. 3.202, shall be considered a debt position or 
an equity position, respectively, for purposes of this section 210 of 
this subpart.
    (1) The specific risk add-on for an individual debt or 
securitization position that represents sold credit protection is capped 
at the notional amount of the credit derivative contract. The specific 
risk add-on for an individual debt or securitization position that 
represents purchased credit protection is capped at the current fair 
value of the transaction plus the absolute value of the present value of 
all remaining payments to the protection seller under the transaction. 
This sum is equal to the value of the protection leg of the transaction.
    (2) For debt, equity, or securitization positions that are 
derivatives with linear payoffs, a national bank or Federal savings 
association must assign a specific risk-weighting factor to the fair 
value of the effective notional amount of the underlying instrument or 
index portfolio, except for a securitization position for which the 
national bank or Federal savings association directly calculates a 
specific risk add-on using the SFA in paragraph (b)(2)(vii)(B) of this 
section. A swap must be included as an effective notional position in 
the underlying instrument or portfolio, with the receiving side treated 
as a long position and the paying side treated as a short position. For 
debt, equity, or securitization positions that are derivatives with 
nonlinear payoffs, a national bank or Federal savings association must 
risk weight the fair value of the effective notional amount of the 
underlying instrument or portfolio multiplied by the derivative's delta.
    (3) For debt, equity, or securitization positions, a national bank 
or Federal savings association may net long and short positions 
(including derivatives) in identical issues or identical indices. A 
national bank or Federal savings association may also net positions in 
depositary receipts against an opposite position in an identical equity 
in different markets, provided that the national bank or Federal savings 
association includes the costs of conversion.
    (4) A set of transactions consisting of either a debt position and 
its credit derivative hedge or a securitization position and its credit 
derivative hedge has a specific risk add-on of zero if:
    (i) The debt or securitization position is fully hedged by a total 
return swap (or similar instrument where there is a matching of swap 
payments and changes in fair value of the debt or securitization 
position);
    (ii) There is an exact match between the reference obligation of the 
swap and the debt or securitization position;
    (iii) There is an exact match between the currency of the swap and 
the debt or securitization position; and
    (iv) There is either an exact match between the maturity date of the 
swap and the maturity date of the debt or securitization position; or, 
in cases where a total return swap references a portfolio of positions 
with different maturity dates, the total return swap maturity date must 
match the maturity date of the underlying asset in that portfolio that 
has the latest maturity date.
    (5) The specific risk add-on for a set of transactions consisting of 
either a debt position and its credit derivative hedge or a 
securitization position and its credit derivative hedge that does not 
meet the criteria of paragraph (a)(4) of this section is equal to 20.0 
percent of the capital requirement for the side of the transaction with 
the higher specific risk add-on when:
    (i) The credit risk of the position is fully hedged by a credit 
default swap or similar instrument;
    (ii) There is an exact match between the reference obligation of the 
credit derivative hedge and the debt or securitization position;
    (iii) There is an exact match between the currency of the credit 
derivative hedge and the debt or securitization position; and
    (iv) There is either an exact match between the maturity date of the 
credit derivative hedge and the maturity date of the debt or 
securitization position; or, in the case where the credit derivative 
hedge has a standard maturity date:

[[Page 194]]

    (A) The maturity date of the credit derivative hedge is within 30 
business days of the maturity date of the debt or securitization 
position; or
    (B) For purchased credit protection, the maturity date of the credit 
derivative hedge is later than the maturity date of the debt or 
securitization position, but is no later than the standard maturity date 
for that instrument that immediately follows the maturity date of the 
debt or securitization position. The maturity date of the credit 
derivative hedge may not exceed the maturity date of the debt or 
securitization position by more than 90 calendar days.
    (6) The specific risk add-on for a set of transactions consisting of 
either a debt position and its credit derivative hedge or a 
securitization position and its credit derivative hedge that does not 
meet the criteria of either paragraph (a)(4) or (a)(5) of this section, 
but in which all or substantially all of the price risk has been hedged, 
is equal to the specific risk add-on for the side of the transaction 
with the higher specific risk add-on.
    (b) Debt and securitization positions. (1) The total specific risk 
add-on for a portfolio of debt or securitization positions is the sum of 
the specific risk add-ons for individual debt or securitization 
positions, as computed under this section. To determine the specific 
risk add-on for individual debt or securitization positions, a national 
bank or Federal savings association must multiply the absolute value of 
the current fair value of each net long or net short debt or 
securitization position in the portfolio by the appropriate specific 
risk-weighting factor as set forth in paragraphs (b)(2)(i) through 
(b)(2)(vii) of this section.
    (2) For the purpose of this section, the appropriate specific risk-
weighting factors include:
    (i) Sovereign debt positions. (A) In accordance with Table 1 to 
Sec. 3.210, a national bank or Federal savings association must assign a 
specific risk-weighting factor to a sovereign debt position based on the 
CRC applicable to the sovereign, and, as applicable, the remaining 
contractual maturity of the position, or if there is no CRC applicable 
to the sovereign, based on whether the sovereign entity is a member of 
the OECD. Notwithstanding any other provision in this subpart, sovereign 
debt positions that are backed by the full faith and credit of the 
United States are treated as having a CRC of 0.

  Table 1 toSec. 3.210--Specific Risk-Weighting Factors for Sovereign
                             Debt Positions
                                       Specific risk-weighting factor
                                                (in percent)
------------------------------------------------------------------------
CRC:
    0-1..........................                   0.0
                                  --------------------------------------
    2-3..........................  Remaining                        0.25
                                    contractual
                                    maturity of 6
                                    months or less.
                                   Remaining                         1.0
                                    contractual
                                    maturity of
                                    greater than 6 and
                                    up to and
                                    including 24
                                    months.
                                   Remaining                         1.6
                                    contractual
                                    maturity exceeds
                                    24 months.
                                  ======================
    4-6..........................                   8.0
                                  ======================
    7............................                   12.0
==================================
OECD Member with No CRC..........                   0.0
==================================
Non-OECD Member with No CRC......                   8.0
==================================
Sovereign Default................                   12.0
------------------------------------------------------------------------

    (B) Notwithstanding paragraph (b)(2)(i)(A) of this section, a 
national bank or Federal savings association may assign to a sovereign 
debt position a specific risk-weighting factor that is lower than the 
applicable specific risk-weighting factor in Table 1 to Sec. 3.210 if:
    (1) The position is denominated in the sovereign entity's currency;
    (2) The national bank or Federal savings association has at least an 
equivalent amount of liabilities in that currency; and

[[Page 195]]

    (3) The sovereign entity allows banks under its jurisdiction to 
assign the lower specific risk-weighting factor to the same exposures to 
the sovereign entity.
    (C) A national bank or Federal savings association must assign a 
12.0 percent specific risk-weighting factor to a sovereign debt position 
immediately upon determination a default has occurred; or if a default 
has occurred within the previous five years.
    (D) A national bank or Federal savings association must assign a 0.0 
percent specific risk-weighting factor to a sovereign debt position if 
the sovereign entity is a member of the OECD and does not have a CRC 
assigned to it, except as provided in paragraph (b)(2)(i)(C) of this 
section.
    (E) A national bank or Federal savings association must assign an 
8.0 percent specific risk-weighting factor to a sovereign debt position 
if the sovereign is not a member of the OECD and does not have a CRC 
assigned to it, except as provided in paragraph (b)(2)(i)(C) of this 
section.
    (ii) Certain supranational entity and multilateral development bank 
debt positions. A national bank or Federal savings association may 
assign a 0.0 percent specific risk-weighting factor to a debt position 
that is an exposure to the Bank for International Settlements, the 
European Central Bank, the European Commission, the International 
Monetary Fund, or an MDB.
    (iii) GSE debt positions. A national bank or Federal savings 
association must assign a 1.6 percent specific risk-weighting factor to 
a debt position that is an exposure to a GSE. Notwithstanding the 
foregoing, a national bank or Federal savings association must assign an 
8.0 percent specific risk-weighting factor to preferred stock issued by 
a GSE.
    (iv) Depository institution, foreign bank, and credit union debt 
positions. (A) Except as provided in paragraph (b)(2)(iv)(B) of this 
section, a national bank or Federal savings association must assign a 
specific risk-weighting factor to a debt position that is an exposure to 
a depository institution, a foreign bank, or a credit union, in 
accordance with Table 2 to Sec. 3.210, based on the CRC that corresponds 
to that entity's home country or the OECD membership status of that 
entity's home country if there is no CRC applicable to the entity's home 
country, and, as applicable, the remaining contractual maturity of the 
position.

 Table 2 toSec. 3.210--Specific Risk-Weighting Factors for Depository
       Institution, Foreign Bank, and Credit Union Debt Positions
                                     Specific risk-weighting factor
                                              (in percent)
------------------------------------------------------------------------
CRC 0-2 or OECD Member with No  Remaining contractual               0.25
 CRC.                            maturity of 6 months
                                 or less.
                                Remaining contractual                1.0
                                 maturity of greater
                                 than 6 and up to and
                                 including 24 months.
                                Remaining contractual                1.6
                                 maturity exceeds 24
                                 months.
------------------------------------------------------------------------
CRC 3.........................                     8.0
------------------------------------------------------------------------
CRC 4-7.......................                    12.0
------------------------------------------------------------------------
Non-OECD Member with No CRC...                     8.0
------------------------------------------------------------------------
Sovereign Default.............                    12.0
------------------------------------------------------------------------

    (B) A national bank or Federal savings association must assign a 
specific risk-weighting factor of 8.0 percent to a debt position that is 
an exposure to a depository institution or a foreign bank that is 
includable in the depository institution's or foreign bank's regulatory 
capital and that is not subject to deduction as a reciprocal holding 
under Sec. 3.22.
    (C) A national bank or Federal savings association must assign a 
12.0 percent specific risk-weighting factor to a debt position that is 
an exposure to a foreign bank immediately upon determination that a 
default by the foreign bank's home country has occurred or if

[[Page 196]]

a default by the foreign bank's home country has occurred within the 
previous five years.
    (v) PSE debt positions. (A) Except as provided in paragraph 
(b)(2)(v)(B) of this section, a national bank or Federal savings 
association must assign a specific risk-weighting factor to a debt 
position that is an exposure to a PSE in accordance with Tables 3 and 4 
to Sec. 3.210 depending on the position's categorization as a general 
obligation or revenue obligation based on the CRC that corresponds to 
the PSE's home country or the OECD membership status of the PSE's home 
country if there is no CRC applicable to the PSE's home country, and, as 
applicable, the remaining contractual maturity of the position, as set 
forth in Tables 3 and 4 of this section.
    (B) A national bank or Federal savings association may assign a 
lower specific risk-weighting factor than would otherwise apply under 
Tables 3 and 4 of this section to a debt position that is an exposure to 
a foreign PSE if:
    (1) The PSE's home country allows banks under its jurisdiction to 
assign a lower specific risk-weighting factor to such position; and
    (2) The specific risk-weighting factor is not lower than the risk 
weight that corresponds to the PSE's home country in accordance with 
Tables 3 and 4 of this section.
    (C) A national bank or Federal savings association must assign a 
12.0 percent specific risk-weighting factor to a PSE debt position 
immediately upon determination that a default by the PSE's home country 
has occurred or if a default by the PSE's home country has occurred 
within the previous five years.

 Table 3 toSec. 3.210--Specific Risk-Weighting Factors for PSE General
                        Obligation Debt Positions
------------------------------------------------------------------------
 
------------------------------------------------------------------------
                                    General obligation specific risk-
                                             weighting factor
                                              (in percent)
------------------------------------------------------------------------
CRC 0-2 or OECD Member with No  Remaining contractual               0.25
 CRC.                            maturity of 6 months
                                 or less.
                                Remaining contractual                1.0
                                 maturity of greater
                                 than 6 and up to and
                                 including 24 months.
                                Remaining contractual                1.6
                                 maturity exceeds 24
                                 months.
------------------------------------------------------------------------
CRC 3.........................                     8.0
------------------------------------------------------------------------
CRC 4-7.......................                    12.0
------------------------------------------------------------------------
Non-OECD Member with No CRC...                     8.0
------------------------------------------------------------------------
Sovereign Default.............                    12.0
------------------------------------------------------------------------


 Table 4 toSec. 3.210--Specific Risk-Weighting Factors for PSE Revenue
                        Obligation Debt Positions
                                    Revenue obligation specific risk-
                                             weighting factor
                                              (in percent)
------------------------------------------------------------------------
CRC 0-1 or OECD Member with No  Remaining contractual               0.25
 CRC.                            maturity of 6 months
                                 or less.
                                Remaining contractual                1.0
                                 maturity of greater
                                 than 6 and up to and
                                 including 24 months.
                                Remaining contractual                1.6
                                 maturity exceeds 24
                                 months.
------------------------------------------------------------------------
CRC 2-3.......................                     8.0
------------------------------------------------------------------------
CRC 4-7.......................                    12.0
------------------------------------------------------------------------
Non-OECD Member with No CRC...                     8.0
------------------------------------------------------------------------

[[Page 197]]

 
Sovereign Default.............                    12.0
------------------------------------------------------------------------

    (vi) Corporate debt positions. Except as otherwise provided in 
paragraph (b)(2)(vi)(B) of this section, a national bank or Federal 
savings association must assign a specific risk-weighting factor to a 
corporate debt position in accordance with the investment grade 
methodology in paragraph (b)(2)(vi)(A) of this section.
    (A) Investment grade methodology. (1) For corporate debt positions 
that are exposures to entities that have issued and outstanding publicly 
traded instruments, a national bank or Federal savings association must 
assign a specific risk-weighting factor based on the category and 
remaining contractual maturity of the position, in accordance with Table 
5 to Sec. 3.210. For purposes of this paragraph (b)(2)(vi)(A)(1), the 
national bank or Federal savings association must determine whether the 
position is in the investment grade or not investment grade category.

  Table 5 toSec. 3.210--Specific Risk-Weighting Factors for Corporate
          Debt Positions Under the Investment Grade Methodology
------------------------------------------------------------------------
                                                         Specific risk-
           Category              Remaining contractual  weighting factor
                                       maturity           (in percent)
------------------------------------------------------------------------
Investment Grade..............  6 months or less......              0.50
                                Greater than 6 and up               2.00
                                 to and including 24
                                 months.
                                Greater than 24 months              4.00
------------------------------------------------------------------------
Non-investment Grade..................................             12.00
------------------------------------------------------------------------

    (2) A national bank or Federal savings association must assign an 
8.0 percent specific risk-weighting factor for corporate debt positions 
that are exposures to entities that do not have publicly traded 
instruments outstanding.
    (B) Limitations. (1) A national bank or Federal savings association 
must assign a specific risk-weighting factor of at least 8.0 percent to 
an interest-only mortgage-backed security that is not a securitization 
position.
    (2) A national bank or Federal savings association shall not assign 
a corporate debt position a specific risk-weighting factor that is lower 
than the specific risk-weighting factor that corresponds to the CRC of 
the issuer's home country, if applicable, in table 1 of this section.
    (vii) Securitization positions. (A) General requirements. (1) A 
national bank or Federal savings association that is not an advanced 
approaches national bank or Federal savings association must assign a 
specific risk-weighting factor to a securitization position using either 
the simplified supervisory formula approach (SSFA) in paragraph 
(b)(2)(vii)(C) of this section (and Sec. 3.211) or assign a specific 
risk-weighting factor of 100 percent to the position.
    (2) A national bank or Federal savings association that is an 
advanced approaches national bank or Federal savings association must 
calculate a specific risk add-on for a securitization position in 
accordance with paragraph (b)(2)(vii)(B) of this section if the national 
bank or Federal savings association and the securitization position each 
qualifies to use the SFA in Sec. 3.143. A national bank or Federal 
savings association that is an advanced approaches national bank or 
Federal savings association with a securitization position that does not 
qualify for the SFA under paragraph (b)(2)(vii)(B) of this section may 
assign a specific risk-weighting factor to the securitization position 
using the SSFA in accordance with paragraph (b)(2)(vii)(C) of this 
section or assign a specific risk-weighting factor of 100 percent to the 
position.
    (3) A national bank or Federal savings association must treat a 
short securitization position as if it is a long

[[Page 198]]

securitization position solely for calculation purposes when using the 
SFA in paragraph (b)(2)(vii)(B) of this section or the SSFA in paragraph 
(b)(2)(vii)(C) of this section.
    (B) SFA. To calculate the specific risk add-on for a securitization 
position using the SFA, a national bank or Federal savings association 
that is an advanced approaches national bank or Federal savings 
association must set the specific risk add-on for the position equal to 
the risk-based capital requirement as calculated under Sec. 3.143.
    (C) SSFA. To use the SSFA to determine the specific risk-weighting 
factor for a securitization position, a national bank or Federal savings 
association must calculate the specific risk-weighting factor in 
accordance with Sec. 3.211.
    (D) Nth-to-default credit derivatives. A national bank or Federal 
savings association must determine a specific risk add-on using the SFA 
in paragraph (b)(2)(vii)(B) of this section, or assign a specific risk-
weighting factor using the SSFA in paragraph (b)(2)(vii)(C) of this 
section to an nth-to-default credit derivative in accordance 
with this paragraph (b)(2)(vii)(D), regardless of whether the national 
bank or Federal savings association is a net protection buyer or net 
protection seller. A national bank or Federal savings association must 
determine its position in the nth-to-default credit 
derivative as the largest notional amount of all the underlying 
exposures.
    (1) For purposes of determining the specific risk add-on using the 
SFA in paragraph (b)(2)(vii)(B) of this section or the specific risk-
weighting factor for an nth-to-default credit derivative 
using the SSFA in paragraph (b)(2)(vii)(C) of this section the national 
bank or Federal savings association must calculate the attachment point 
and detachment point of its position 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 national bank's or Federal savings association's position to the 
total notional amount of all underlying exposures. For purposes of the 
SSFA, parameter A is expressed as a decimal value between zero and one. 
For purposes of using the SFA in paragraph (b)(2)(vii)(B) of this 
section to calculate the specific add-on for its position in an 
nth-to-default credit derivative, parameter A must be set 
equal to the credit enhancement level (L) input to the SFA formula in 
section 143 of this subpart. In the case of a first-to-default credit 
derivative, there are no underlying exposures that are subordinated to 
the national bank's or Federal savings association's position. 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 national bank's or Federal savings association's 
position.
    (ii) The detachment point (parameter D) equals the sum of parameter 
A plus the ratio of the notional amount of the national bank's or 
Federal savings association's position in the nth-to-default 
credit derivative to the total notional amount of all underlying 
exposures. For purposes of the SSFA, parameter A is expressed as a 
decimal value between zero and one. For purposes of using the SFA in 
paragraph (b)(2)(vii)(B) of this section to calculate the specific risk 
add-on for its position in an nth-to-default credit 
derivative, parameter D must be set to equal the L input plus the 
thickness of tranche T input to the SFA formula in Sec. 3.143 of this 
subpart.
    (2) A national bank or Federal savings association that does not use 
the SFA in paragraph (b)(2)(vii)(B) of this section to determine a 
specific risk-add on, or the SSFA in paragraph (b)(2)(vii)(C) of this 
section to determine a specific risk-weighting factor for its position 
in an nth-to-default credit derivative must assign a specific 
risk-weighting factor of 100 percent to the position.
    (c) Modeled correlation trading positions. For purposes of 
calculating the comprehensive risk measure for modeled correlation 
trading positions under either paragraph (a)(2)(i) or (a)(2)(ii) of 
Sec. 3.209, the total specific risk add-on is the greater of:
    (1) The sum of the national bank's or Federal savings association's 
specific risk add-ons for each net long correlation trading position 
calculated under this section; or

[[Page 199]]

    (2) The sum of the national bank's or Federal savings association's 
specific risk add-ons for each net short correlation trading position 
calculated under this section.
    (d) Non-modeled securitization positions. For securitization 
positions that are not correlation trading positions and for 
securitizations that are correlation trading positions not modeled under 
Sec. 3.209, the total specific risk add-on is the greater of:
    (1) The sum of the national bank's or Federal savings association's 
specific risk add-ons for each net long securitization position 
calculated under this section; or
    (2) The sum of the national bank's or Federal savings association's 
specific risk add-ons for each net short securitization position 
calculated under this section.
    (e) Equity positions. The total specific risk add-on for a portfolio 
of equity positions is the sum of the specific risk add-ons of the 
individual equity positions, as computed under this section. To 
determine the specific risk add-on of individual equity positions, a 
national bank or Federal savings association must multiply the absolute 
value of the current fair value of each net long or net short equity 
position by the appropriate specific risk-weighting factor as determined 
under this paragraph (e):
    (1) The national bank or Federal savings association must multiply 
the absolute value of the current fair value of each net long or net 
short equity position by a specific risk-weighting factor of 8.0 
percent. For equity positions that are index contracts comprising a 
well-diversified portfolio of equity instruments, the absolute value of 
the current fair value of each net long or net short position is 
multiplied by a specific risk-weighting factor of 2.0 percent.\29\
---------------------------------------------------------------------------

    \29\ A portfolio is well-diversified if it contains a large number 
of individual equity positions, with no single position representing a 
substantial portion of the portfolio's total fair value.
---------------------------------------------------------------------------

    (2) For equity positions arising from the following futures-related 
arbitrage strategies, a national bank or Federal savings association may 
apply a 2.0 percent specific risk-weighting factor to one side (long or 
short) of each position with the opposite side exempt from an additional 
capital requirement:
    (i) Long and short positions in exactly the same index at different 
dates or in different market centers; or
    (ii) Long and short positions in index contracts at the same date in 
different, but similar indices.
    (3) For futures contracts on main indices that are matched by 
offsetting positions in a basket of stocks comprising the index, a 
national bank or Federal savings association may apply a 2.0 percent 
specific risk-weighting factor to the futures and stock basket positions 
(long and short), provided that such trades are deliberately entered 
into and separately controlled, and that the basket of stocks is 
comprised of stocks representing at least 90.0 percent of the 
capitalization of the index. A main index refers to the Standard & 
Poor's 500 Index, the FTSE All-World Index, and any other index for 
which the national bank or Federal savings association can demonstrate 
to the satisfaction of the OCC that the equities represented in the 
index have liquidity, depth of market, and size of bid-ask spreads 
comparable to equities in the Standard & Poor's 500 Index and FTSE All-
World Index.
    (f) Due diligence requirements for securitization positions. (1) A 
national bank or Federal savings association must demonstrate to the 
satisfaction of the OCC a comprehensive understanding of the features of 
a securitization position that would materially affect the performance 
of the position by conducting and documenting the analysis set forth in 
paragraph (f)(2) of this section. The national bank's or Federal savings 
association's analysis must be commensurate with the complexity of the 
securitization position and the materiality of the position in relation 
to capital.
    (2) A national bank or Federal savings association must demonstrate 
its comprehensive understanding for each securitization position by:
    (i) Conducting an analysis of the risk characteristics of a 
securitization position prior to acquiring the position and document 
such analysis within three

[[Page 200]]

business days after acquiring position, considering:
    (A) Structural features of the securitization that would materially 
impact the performance of the position, for example, the contractual 
cash flow waterfall, waterfall-related triggers, credit enhancements, 
liquidity enhancements, fair value triggers, the performance of 
organizations that service the position, 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 loan-to-value ratio; and industry and 
geographic diversification data on the underlying exposure(s);
    (C) Relevant market data of the securitization, for example, bid-ask 
spreads, 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
    (D) For resecuritization positions, 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 (f)(1) of this section for each securitization position.



Sec. 3.211  Simplified supervisory formula approach (SSFA).

    (a) General requirements. To use the SSFA to determine the specific 
risk-weighting factor for a securitization position, a national bank or 
Federal savings association 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; if the contracts 
governing the underlying exposures of the securitization require 
payments on a monthly or quarterly basis, the data used to assign the 
parameters described in paragraph (b) of this section must be no more 
than 91 calendar days old. A national bank or Federal savings 
association that does not have the appropriate data to assign the 
parameters described in paragraph (b) of this section must assign a 
specific risk-weighting factor of 100 percent to the position.
    (b) SSFA parameters. To calculate the specific risk-weighting factor 
for a securitization position using the SSFA, a national bank or Federal 
savings association must have accurate information on the five inputs to 
the SSFA calculation described in paragraphs (b)(1) through (b)(5) of 
this section.
    (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 subpart D. KG is 
expressed as a decimal value between zero and one (that is, an average 
risk weight of 100 percent represents a value of KG equal to 
0.08).
    (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 of the securitization that meet any of the criteria 
as set forth in paragraphs (b)(2)(i) through (vi) of this section to the 
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 payments for 90 days or more, other 
than principal or interest payments deferred on:
    (A) Federally-guaranteed student loans, in accordance with the terms 
of those guarantee programs; or
    (B) Consumer loans, including non-federally-guaranteed student 
loans, provided that such payments are deferred pursuant to provisions 
included in the contract at the time funds are disbursed that provide 
for period(s) of deferral that are not initiated based on changes in the 
creditworthiness of the borrower; or
    (vi) Is in default.

[[Page 201]]

    (3) Parameter A is the attachment point for the position, which 
represents the threshold at which credit losses will first be allocated 
to the position. Except as provided in Sec. 3.210(b)(2)(vii)(D) for 
nth-to-default credit derivatives, parameter A equals the 
ratio of the current dollar amount of underlying exposures that are 
subordinated to the position of the national bank or Federal savings 
association 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 position that contains the 
national bank's or Federal savings association'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 position, which 
represents the threshold at which credit losses of principal allocated 
to the position would result in a total loss of principal. Except as 
provided in Sec. 3.210(b)(2)(vii)(D) for nth-to-default 
credit derivatives, parameter D equals parameter A plus the ratio of the 
current dollar amount of the securitization positions that are pari 
passu with the position (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 positions that are not resecuritization positions and 
equal to 1.5 for resecuritization positions.
    (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 exposures. KA is 
defined in paragraph (d) of this section. The values of parameters A and 
D, relative to KA determine the specific risk-weighting 
factor assigned to a position as described in this paragraph (c) and 
paragraph (d) of this section. The specific risk-weighting factor 
assigned to a securitization position, or portion of a position, as 
appropriate, is the larger of the specific risk-weighting factor 
determined in accordance with this paragraph (c), paragraph (d) of this 
section, and a specific risk-weighting factor of 1.6 percent.
    (1) When the detachment point, parameter D, for a securitization 
position is less than or equal to KA, the position must be 
assigned a specific risk-weighting factor of 100 percent.
    (2) When the attachment point, parameter A, for a securitization 
position is greater than or equal to KA, the national bank or 
Federal savings association must calculate the specific risk-weighting 
factor in accordance with paragraph (d) of this section.
    (3) When A is less than KA and D is greater than 
KA, the specific risk-weighting factor is a weighted-average 
of 1.00 and KSSFA calculated under paragraphs (c)(3)(i) and 
(c)(3)(ii) of this section. For the purpose of this calculation:
    (i) The weight assigned to 1.00 equals

[[Page 202]]

[GRAPHIC] [TIFF OMITTED] TR11OC13.057



Sec. 3.212  Market risk disclosures.

    (a) Scope. A national bank or Federal savings association must 
comply with this section unless it is a consolidated subsidiary of a 
bank holding company or a depository institution that is subject to 
these requirements or of a non-U.S. banking organization that is subject 
to comparable public disclosure requirements in its home jurisdiction. A 
national bank or Federal savings association must make timely public 
disclosures each calendar quarter. If a significant change occurs, such 
that the most recent reporting amounts are no longer reflective of the 
national bank's or Federal savings association's capital adequacy and 
risk profile, then a brief discussion of this change and its likely 
impact must be provided as soon as practicable thereafter. Qualitative 
disclosures that typically do not change each quarter may be disclosed 
annually, provided any significant changes are disclosed in the interim. 
If a national bank or Federal savings association believes that 
disclosure of specific commercial or financial information would 
prejudice seriously its position by making public certain information 
that is either proprietary or confidential in nature, the national bank 
or Federal savings association is not required to disclose these 
specific items, 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. 
The national bank's or Federal

[[Page 203]]

savings association's management may provide all of the disclosures 
required by this section in one place on the national bank's or Federal 
savings association's public Web site or may provide the disclosures in 
more than one public financial report or other regulatory reports, 
provided that the national bank or Federal savings association publicly 
provides a summary table specifically indicating the location(s) of all 
such disclosures.
    (b) Disclosure policy. The national bank or Federal savings 
association must have a formal disclosure policy approved by the board 
of directors that addresses the national bank's or Federal savings 
association's approach for determining its market risk disclosures. The 
policy must address the associated internal controls and disclosure 
controls and procedures. The board of directors and senior management 
must ensure that appropriate verification of the disclosures takes place 
and that effective internal controls and disclosure controls and 
procedures are maintained. One or more senior officers of the national 
bank or Federal savings association must attest that the disclosures 
meet the requirements of this subpart, and 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 section.
    (c) Quantitative disclosures. (1) For each material portfolio of 
covered positions, the national bank or Federal savings association must 
provide timely public disclosures of the following information at least 
quarterly:
    (i) The high, low, and mean VaR-based measures over the reporting 
period and the VaR-based measure at period-end;
    (ii) The high, low, and mean stressed VaR-based measures over the 
reporting period and the stressed VaR-based measure at period-end;
    (iii) The high, low, and mean incremental risk capital requirements 
over the reporting period and the incremental risk capital requirement 
at period-end;
    (iv) The high, low, and mean comprehensive risk capital requirements 
over the reporting period and the comprehensive risk capital requirement 
at period-end, with the period-end requirement broken down into 
appropriate risk classifications (for example, default risk, migration 
risk, correlation risk);
    (v) Separate measures for interest rate risk, credit spread risk, 
equity price risk, foreign exchange risk, and commodity price risk used 
to calculate the VaR-based measure; and
    (vi) A comparison of VaR-based estimates with actual gains or losses 
experienced by the national bank or Federal savings association, with an 
analysis of important outliers.
    (2) In addition, the national bank or Federal savings association 
must disclose publicly the following information at least quarterly:
    (i) The aggregate amount of on-balance sheet and off-balance sheet 
securitization positions by exposure type; and
    (ii) The aggregate amount of correlation trading positions.
    (d) Qualitative disclosures. For each material portfolio of covered 
positions, the national bank or Federal savings association must provide 
timely public disclosures of the following information at least annually 
after the end of the fourth calendar quarter, or more frequently in the 
event of material changes for each portfolio:
    (1) The composition of material portfolios of covered positions;
    (2) The national bank's or Federal savings association's valuation 
policies, procedures, and methodologies for covered positions including, 
for securitization positions, the methods and key assumptions used for 
valuing such positions, any significant changes since the last reporting 
period, and the impact of such change;
    (3) The characteristics of the internal models used for purposes of 
this subpart. For the incremental risk capital requirement and the 
comprehensive risk capital requirement, this must include:
    (i) The approach used by the national bank or Federal savings 
association to determine liquidity horizons;
    (ii) The methodologies used to achieve a capital assessment that is

[[Page 204]]

consistent with the required soundness standard; and
    (iii) The specific approaches used in the validation of these 
models;
    (4) A description of the approaches used for validating and 
evaluating the accuracy of internal models and modeling processes for 
purposes of this subpart;
    (5) For each market risk category (that is, interest rate risk, 
credit spread risk, equity price risk, foreign exchange risk, and 
commodity price risk), a description of the stress tests applied to the 
positions subject to the factor;
    (6) The results of the comparison of the national bank's or Federal 
savings association's internal estimates for purposes of this subpart 
with actual outcomes during a sample period not used in model 
development;
    (7) The soundness standard on which the national bank's or Federal 
savings association's internal capital adequacy assessment under this 
subpart is based, including a description of the methodologies used to 
achieve a capital adequacy assessment that is consistent with the 
soundness standard;
    (8) A description of the national bank's or Federal savings 
association's processes for monitoring changes in the credit and market 
risk of securitization positions, including how those processes differ 
for resecuritization positions; and
    (9) A description of the national bank's or Federal savings 
association's policy governing the use of credit risk mitigation to 
mitigate the risks of securitization and resecuritization positions.



Secs. 3.213-3.299  [Reserved]



                     Subpart G_Transition Provisions

    Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted.



Sec. 3.300  Transitions.

    (a) Capital conservation and countercyclical capital buffer. (1) 
From January 1, 2014 through December 31, 2015, a national bank or 
Federal savings association is not subject to limits on distributions 
and discretionary bonus payments under Sec. 3.11 of subpart B of this 
part notwithstanding the amount of its capital conservation buffer or 
any applicable countercyclical capital buffer amount.
    (2) Beginning January 1, 2016 through December 31, 2018 a national 
bank's or Federal savings association's maximum payout ratio shall be 
determined as set forth in Table 1 to Sec. 3.300.

                                             Table 1 toSec. 3.300
----------------------------------------------------------------------------------------------------------------
                                                                                        Maximum payout ratio (as
           Transition period                      Capital conservation buffer           a percentage of eligible
                                                                                            retained income)
----------------------------------------------------------------------------------------------------------------
Calendar year 2016....................  Greater than 0.625 percent (plus 25 percent of  No payout ratio
                                         any applicable countercyclical capital buffer   limitation applies
                                         amount).                                        under this section.
                                        Less than or equal to 0.625 percent (plus 25    60 percent.
                                         percent of any applicable countercyclical
                                         capital buffer amount), and greater than
                                         0.469 percent (plus 17.25 percent of any
                                         applicable countercyclical capital buffer
                                         amount).
                                        Less than or equal to 0.469 percent (plus       40 percent.
                                         17.25 percent of any applicable
                                         countercyclical capital buffer amount), and
                                         greater than 0.313 percent (plus 12.5 percent
                                         of any applicable countercyclical capital
                                         buffer amount).
                                        Less than or equal to 0.313 percent (plus 12.5  20 percent.
                                         percent of any applicable countercyclical
                                         capital buffer amount), and greater than
                                         0.156 percent (plus 6.25 percent of any
                                         applicable countercyclical capital buffer
                                         amount).
                                        Less than or equal to 0.156 percent (plus 6.25  0 percent.
                                         percent of any applicable countercyclical
                                         capital buffer amount).
Calendar year 2017....................  Greater than 1.25 percent (plus 50 percent of   No payout ratio
                                         any applicable countercyclical capital buffer   limitation applies
                                         amount).                                        under this section.
                                        Less than or equal to 1.25 percent (plus 50     60 percent.
                                         percent of any applicable countercyclical
                                         capital buffer amount), and greater than
                                         0.938 percent (plus 37.5 percent of any
                                         applicable countercyclical capital buffer
                                         amount).
                                        Less than or equal to 0.938 percent (plus 37.5  40 percent.
                                         percent of any applicable countercyclical
                                         capital buffer amount), and greater than
                                         0.625 percent (plus 25 percent of any
                                         applicable countercyclical capital buffer
                                         amount).

[[Page 205]]

 
                                        Less than or equal to 0.625 percent (plus 25    20 percent.
                                         percent of any applicable countercyclical
                                         capital buffer amount), and greater than
                                         0.313 percent (plus 12.5 percent of any
                                         applicable countercyclical capital buffer
                                         amount).
                                        Less than or equal to 0.313 percent (plus 12.5  0 percent.
                                         percent of any applicable countercyclical
                                         capital buffer amount).
Calendar year 2018....................  Greater than 1.875 percent (plus 75 percent of  No payout ratio
                                         any applicable countercyclical capital buffer   limitation applies
                                         amount).                                        under this section.
                                        Less than or equal to 1.875 percent (plus 75    60 percent.
                                         percent of any applicable countercyclical
                                         capital buffer amount), and greater than
                                         1.406 percent (plus 56.25 percent of any
                                         applicable countercyclical capital buffer
                                         amount).
                                        Less than or equal to 1.406 percent (plus       40 percent.
                                         56.25 percent of any applicable
                                         countercyclical capital buffer amount), and
                                         greater than 0.938 percent (plus 37.5 percent
                                         of any applicable countercyclical capital
                                         buffer amount).
                                        Less than or equal to 0.938 percent (plus 37.5  20 percent.
                                         percent of any applicable countercyclical
                                         capital buffer amount), and greater than
                                         0.469 percent (plus 18.75 percent of any
                                         applicable countercyclical capital buffer
                                         amount).
                                        Less than or equal to 0.469 percent (plus       0 percent.
                                         18.75 percent of any applicable
                                         countercyclical capital buffer amount).
----------------------------------------------------------------------------------------------------------------

    (b) Regulatory capital adjustments and deductions. Beginning January 
1, 2014 for an advanced approaches national bank or Federal savings 
association, and beginning January 1, 2015 for a national bank or 
Federal savings association that is not an advanced approaches national 
bank or Federal savings association, and in each case through December 
31, 2017, a national bank or Federal savings association must make the 
capital adjustments and deductions in Sec. 3.22 in accordance with the 
transition requirements in this paragraph (b). Beginning January 1, 
2018, a national bank or Federal savings association must make all 
regulatory capital adjustments and deductions in accordance with 
Sec. 3.22.
    (1) Transition deductions from common equity tier 1 capital. 
Beginning January 1, 2014 for an advanced approaches national bank or 
Federal savings association, and beginning January 1, 2015 for a 
national bank or Federal savings association that is not an advanced 
approaches national bank or Federal savings association, and in each 
case through December 31, 2017, a national bank or Federal savings 
association, must make the deductions required under Sec. 3.22(a)(1)-(8) 
from common equity tier 1 or tier 1 capital elements in accordance with 
the percentages set forth in Table 2 and Table 3 to Sec. 3.300.
    (i) A national bank or Federal savings association must deduct the 
following items from common equity tier 1 and additional tier 1 capital 
in accordance with the percentages set forth in Table 2 to Sec. 3.300: 
goodwill (Sec. 3.22(a)(1)), DTAs that arise from net operating loss and 
tax credit carryforwards (Sec. 3.22(a)(3)), a gain-on-sale in connection 
with a securitization exposure (Sec. 3.22(a)(4)), defined benefit 
pension fund assets (Sec. 3.22(a)(5)), expected credit loss that exceeds 
eligible credit reserves (for advanced approaches national banks or 
Federal savings associations that have completed the parallel run 
process and that have received notifications from the OCC pursuant to 
Sec. 3.121(d) of subpart E) and financial subsidiaries 
(Sec. 3.22(a)(7)), and nonincludable subsidiaries of a Federal savings 
association (Sec. 3.22(a)(8)).

[[Page 206]]



                                             Table 2 toSec. 3.300
----------------------------------------------------------------------------------------------------------------
                                      Transition deductions    Transition deductions underSec. 3.22(a)(3)-(6)
                                     underSec. 3.22(a)(1)                         and (8)
                                             and (7)         ---------------------------------------------------
         Transition period         --------------------------
                                        Percentage of the         Percentage of the         Percentage of the
                                     deductions from common    deductions from common    deductions from tier 1
                                      equity tier 1 capital     equity tier 1 capital            capital
----------------------------------------------------------------------------------------------------------------
Calendar year 2014................                      100                        20                        80
Calendar year 2015................                      100                        40                        60
Calendar year 2016................                      100                        60                        40
Calendar year 2017................                      100                        80                        20
Calendar year 2018, and thereafter                      100                       100                         0
----------------------------------------------------------------------------------------------------------------

    (ii) A national bank or Federal savings association must deduct from 
common equity tier 1 capital any intangible assets other than goodwill 
and MSAs in accordance with the percentages set forth in Table 3 to 
Sec. 3.300.
    (iii) A national bank or Federal savings association must apply a 
100 percent risk-weight to the aggregate amount of intangible assets 
other than goodwill and MSAs that are not required to be deducted from 
common equity tier 1 capital under this section.

                         Table 3 toSec. 3.300
------------------------------------------------------------------------
                                   Transition deductions under Sec.
                               3.22(a)(2)--percentage of the deductions
      Transition period            from common equity tier 1 capital
 
------------------------------------------------------------------------
Calendar year 2014..........                                         20
Calendar year 2015..........                                         40
Calendar year 2016..........                                         60
Calendar year 2017..........                                         80
Calendar year 2018, and                                             100
 thereafter.................
------------------------------------------------------------------------

    (2) Transition adjustments to common equity tier 1 capital. 
Beginning January 1, 2014 for an advanced approaches national bank or 
Federal savings association, and beginning January 1, 2015 for a 
national bank or Federal savings association that is not an advanced 
approaches national bank or Federal savings association, and in each 
case through December 31, 2017, a national bank or Federal savings 
association, must allocate the regulatory adjustments related to changes 
in the fair value of liabilities due to changes in the national bank's 
or Federal savings association's own credit risk (Sec. 3.22(b)(1)(iii)) 
between common equity tier 1 capital and tier 1 capital in accordance 
with the percentages set forth in Table 4 to Sec. 3.300.
    (i) If the aggregate amount of the adjustment is positive, the 
national bank or Federal savings association must allocate the deduction 
between common equity tier 1 and tier 1 capital in accordance with Table 
4 to Sec. 3.300.
    (ii) If the aggregate amount of the adjustment is negative, the 
national bank or Federal savings association must add back the 
adjustment to common equity tier 1 capital or to tier 1 capital, in 
accordance with Table 4 to Sec. 3.300.

                                             Table 4 toSec. 3.300
----------------------------------------------------------------------------------------------------------------
                                                      Transition adjustments underSec. 3.22(b)(2)
                                       -------------------------------------------------------------------------
           Transition period                Percentage of the adjustment
                                          applied to common equity tier 1        Percentage of the adjustment
                                                      capital                     applied to tier 1 capital
----------------------------------------------------------------------------------------------------------------
Calendar year 2014....................                                  20                                   80
Calendar year 2015....................                                  40                                   60
Calendar year 2016....................                                  60                                   40
Calendar year 2017....................                                  80                                   20
Calendar year 2018, and thereafter....                                 100                                    0
----------------------------------------------------------------------------------------------------------------


[[Page 207]]

    (3) Transition adjustments to AOCI for an advanced approaches 
national bank or Federal savings association and a national bank or 
Federal savings association that has not made an AOCI opt-out election 
under Sec. 3.22(b)(2). Beginning January 1, 2014 for an advanced 
approaches national bank or Federal savings association, and beginning 
January 1, 2015 for a national bank or Federal savings association that 
is not an advanced approaches national bank or Federal savings 
association that has not made an AOCI opt-out election under 
Sec. 3.22(b)(2), and in each case through December 31, 2017, a national 
bank or Federal savings association must adjust common equity tier 1 
capital with respect to the transition AOCI adjustment amount 
(transition AOCI adjustment amount):
    (i) The transition AOCI adjustment amount is the aggregate amount of 
a national bank's or Federal savings association's:
    (A) Unrealized gains on available-for-sale securities that are 
preferred stock classified as an equity security under GAAP or 
available-for-sale equity exposures, plus
    (B) Net unrealized gains or losses on available-for-sale securities 
that are not preferred stock classified as an equity security under GAAP 
or available-for-sale equity exposures, plus
    (C) Any amounts recorded in AOCI attributed to defined benefit 
postretirement plans resulting from the initial and subsequent 
application of the relevant GAAP standards that pertain to such plans 
(excluding, at the national bank's or Federal savings association's 
option, the portion relating to pension assets deducted under section 
22(a)(5)), plus
    (D) Accumulated net gains or losses on cash flow hedges related to 
items that are reported on the balance sheet at fair value included in 
AOCI, plus
    (E) Net unrealized gains or losses on held-to-maturity securities 
that are included in AOCI.
    (ii) A national bank or Federal savings association must make the 
following adjustment to its common equity tier 1 capital:
    (A) If the transition AOCI adjustment amount is positive, the 
appropriate amount must be deducted from common equity tier 1 capital in 
accordance with Table 5 to Sec. 3.300.
    (B) If the transition AOCI adjustment amount is negative, the 
appropriate amount must be added back to common equity tier 1 capital in 
accordance with Table 5 to Sec. 3.300.

                         Table 5 toSec. 3.300
------------------------------------------------------------------------
                                   Percentage of the transition AOCI
      Transition period        adjustment amount to be applied to common
                                         equity tier 1 capital
------------------------------------------------------------------------
Calendar year 2014..........                                         80
Calendar year 2015..........                                         60
Calendar year 2016..........                                         40
Calendar year 2017..........                                         20
Calendar year 2018 and                                                0
 thereafter.................
------------------------------------------------------------------------

    (iii) A national bank or Federal savings association may include in 
tier 2 capital the percentage of unrealized gains on available-for-sale 
preferred stock classified as an equity security under GAAP and 
available-for-sale equity exposures as set forth in Table 6 to 
Sec. 3.300.

                         Table 6 toSec. 3.300
------------------------------------------------------------------------
                                   Percentage of unrealized gains on
                                  available-for-sale preferred stock
                                classified as an equity security under
      Transition period           GAAP and available-for-sale equity
                               exposures that may be included in tier 2
                                                capital
------------------------------------------------------------------------
Calendar year 2014..........                                         36
Calendar year 2015..........                                         27
Calendar year 2016..........                                         18
Calendar year 2017..........                                          9

[[Page 208]]

 
Calendar year 2018 and                                                0
 thereafter.................
------------------------------------------------------------------------

    (4) Additional transition deductions from regulatory capital. (i) 
Beginning January 1, 2014 for an advanced approaches national bank or 
Federal savings association, and beginning January 1, 2015 for a 
national bank or Federal savings association that is not an advanced 
approaches national bank or Federal savings association, and in each 
case through December 31, 2017, a national bank or Federal savings 
association, must use Table 7 to Sec. 3.300 to determine the amount of 
investments in capital instruments and the items subject to the 10 and 
15 percent common equity tier 1 capital deduction thresholds 
(Sec. 3.22(d)) (that is, MSAs, DTAs arising from temporary differences 
that the national bank or Federal savings association could not realize 
through net operating loss carrybacks, and significant investments in 
the capital of unconsolidated financial institutions in the form of 
common stock) that must be deducted from common equity tier 1 capital.
    (ii) Beginning January 1, 2014 for an advanced approaches national 
bank or Federal savings association, and beginning January 1, 2015 for a 
national bank or Federal savings association that is not an advanced 
approaches national bank or Federal savings association, and in each 
case through December 31, 2017, a national bank or Federal savings 
association must apply a 100 percent risk-weight to the aggregate amount 
of the items subject to the 10 and 15 percent common equity tier 1 
capital deduction thresholds that are not deducted under this section. 
As set forth in Sec. 3.22(d)(2), beginning January 1, 2018, a national 
bank or Federal savings association must apply a 250 percent risk-weight 
to the aggregate amount of the items subject to the 10 and 15 percent 
common equity tier 1 capital deduction thresholds that are not deducted 
from common equity tier 1 capital.

                         Table 7 toSec. 3.300
------------------------------------------------------------------------
                                 Transitions for deductions under Sec.
                               3.22(c) and (d)--Percentage of additional
      Transition period           deductions from regulatory capital
 
------------------------------------------------------------------------
Calendar year 2014..........                                         20
Calendar year 2015..........                                         40
Calendar year 2016..........                                         60
Calendar year 2017..........                                         80
Calendar year 2018 and                                              100
 thereafter.................
------------------------------------------------------------------------

    (iii) For purposes of calculating the transition deductions in this 
paragraph (b)(4) beginning January 1, 2014 for an advanced approaches 
national bank or Federal savings association, and beginning January 1, 
2015 for a national bank or Federal savings association that is not an 
advanced approaches national bank or Federal savings association, and in 
each case through December 31, 2017, a national bank's or Federal 
savings association's 15 percent common equity tier 1 capital deduction 
threshold for MSAs, DTAs arising from temporary differences that the 
national bank or Federal savings association could not realize through 
net operating loss carrybacks, and significant investments in the 
capital of unconsolidated financial institutions in the form of common 
stock is equal to 15 percent of the sum of the national bank's or 
Federal savings association's common equity tier 1 elements, after

[[Page 209]]

regulatory adjustments and deductions required under Sec. 3.22(a) 
through (c) (transition 15 percent common equity tier 1 capital 
deduction threshold).
    (iv) Beginning January 1, 2018, a national bank or Federal savings 
association must calculate the 15 percent common equity tier 1 capital 
deduction threshold in accordance with Sec. 3.22(d).
    (c) Non-qualifying capital instruments (1)--(3) [Reserved]
    (4) Depository institutions. (i) Beginning on January 1, 2014, a 
depository institution that is an advanced approaches national bank or 
Federal savings association, and beginning on January 1, 2015, all other 
depository institutions, may include in regulatory capital debt or 
equity instruments issued prior to September 12, 2010 that do not meet 
the criteria for additional tier 1 or tier 2 capital instruments in 
Sec. 3.20 but that were included in tier 1 or tier 2 capital 
respectively as of September 12, 2010 (non-qualifying capital 
instruments issued prior to September 12, 2010) up to the percentage of 
the outstanding principal amount of such non-qualifying capital 
instruments as of January 1, 2014 in accordance with Table 9 to 
Sec. 3.300.
    (ii) Table 9 to Sec. 3.300 applies separately to tier 1 and tier 2 
non-qualifying capital instruments.
    (iii) The amount of non-qualifying capital instruments that cannot 
be included in additional tier 1 capital under this section may be 
included in tier 2 capital without limitation, provided that the 
instruments meet the criteria for tier 2 capital instruments under 
Sec. 3.20(d).

                                             Table 9 toSec. 3.300
----------------------------------------------------------------------------------------------------------------
                                                                       Percentage of non-qualifying capital
                 Transition period (calendar year)                   instruments includable in additional tier
                                                                                1 or tier 2 capital
---------------------------------------------------------------------------------------------------------------
Calendar year 2014................................................                                         80
Calendar year 2015................................................                                         70
Calendar year 2016................................................                                         60
Calendar year 2017................................................                                         50
Calendar year 2018................................................                                         40
Calendar year 2019................................................                                         30
Calendar year 2020................................................                                         20
Calendar year 2021................................................                                         10
Calendar year 2022 and thereafter.................................                                          0
----------------------------------------------------------------------------------------------------------------

    (d) Minority interest--(1) Surplus minority interest. Beginning 
January 1, 2014 for an advanced approaches national bank or Federal 
savings association, and beginning January 1, 2015 for a national bank 
or Federal savings association that is not an advanced approaches 
national bank or Federal savings association, and in each case through 
December 31, 2017, a national bank or Federal savings association may 
include in common equity tier 1 capital, tier 1 capital, or total 
capital the percentage of the common equity tier 1 minority interest, 
tier 1 minority interest and total capital minority interest outstanding 
as of January 1, 2014 that exceeds any common equity tier 1 minority 
interest, tier 1 minority interest or total capital minority interest 
includable under Sec. 3.21 (surplus minority interest), respectively, as 
set forth in Table 10 to Sec. 3.300.
    (2) Non-qualifying minority interest. Beginning January 1, 2014 for 
an advanced approaches national bank or Federal savings association, and 
beginning January 1, 2015 for a national bank or Federal savings 
association that is not an advanced approaches national bank or Federal 
savings association, and in each case through December 31, 2017, a 
national bank or Federal savings association may include in tier 1 
capital or total capital the percentage of the tier 1 minority interest 
and total capital minority interest outstanding as of January 1, 2014 
that does not meet the criteria for additional tier 1 or tier 2 capital 
instruments in Sec. 3.20 (non-qualifying minority interest), as set 
forth in Table 10 to Sec. 3.300.

[[Page 210]]



                         Table 10 toSec. 3.300
------------------------------------------------------------------------
                              Percentage of the amount of surplus or non-
                               qualifying minority interest that can be
      Transition period        included in regulatory capital during the
                                           transition period
------------------------------------------------------------------------
Calendar year 2014..........                                         80
Calendar year 2015..........                                         60
Calendar year 2016..........                                         40
Calendar year 2017..........                                         20
Calendar year 2018 and                                                0
 thereafter.................
------------------------------------------------------------------------

    (e) Prompt corrective action. For purposes of 12 CFR part 6, a 
national bank or Federal savings association must calculate its capital 
measures and tangible equity ratio in accordance with the transition 
provisions in this section.

[78 FR 62157, 62273, 62274, Oct. 11, 2013]



Subpart H_Establishment of Minimum Capital Ratios for an Individual Bank 
                or Individual Federal Savings Association

    Source: 78 FR 62269, Oct. 11, 2013, unless otherwise noted.



Sec. 3.401  Purpose and scope.

    The rules and procedures specified in this subpart are applicable to 
a proceeding to establish required minimum capital ratios that would 
otherwise be applicable to a national bank or Federal savings 
association under subpart B of this part. The OCC is authorized under 12 
U.S.C. 1464(s)(2) and 3907(a)(2) to establish such minimum capital 
requirements for a national bank or Federal savings association as the 
OCC, in its discretion, deems appropriate in light of the particular 
circumstances at that national bank or Federal savings association. 
Proceedings under this subpart also may be initiated to require a 
national bank or Federal savings association having capital ratios above 
those set forth in subpart B of this part, or other legal authority to 
continue to maintain those higher ratios.



Sec. 3.402  Applicability.

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

[[Page 211]]

which it has significant business relationships.



Sec. 3.403  Standards for determination of appropriate individual
minimum capital ratios.

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



Sec. 3.404  Procedures.

    (a) Notice. When the OCC determines that minimum capital ratios 
above those set forth in subpart B of this part or other legal authority 
are necessary or appropriate for a particular national bank or Federal 
savings association, the OCC will notify the national bank or Federal 
savings association in writing of the proposed minimum capital ratios 
and the date by which they should be reached (if applicable) and will 
provide an explanation of why the ratios proposed are considered 
necessary or appropriate for the national bank or Federal savings 
association.
    (b) Response. (1) The national bank or Federal savings association 
may respond to any or all of the items in the notice. The response 
should include any matters which the national bank or Federal savings 
association would have the OCC consider in deciding whether individual 
minimum capital ratios should be established for the national bank or 
Federal savings association, what those capital ratios should be, and, 
if applicable, when they should be achieved. The response must be in 
writing and delivered to the designated OCC official within 30 days 
after the date on which the national bank or Federal savings association 
received the notice. The OCC may shorten the time period when, in the 
opinion of the OCC, the condition of the national bank or Federal 
savings association so requires, provided that the national bank or 
Federal savings association is informed promptly of the new time period, 
or with the consent of the national bank or Federal savings association. 
In its discretion, the OCC may extend the time period for good cause.
    (2) Failure to respond within 30 days or such other time period as 
may be specified by the OCC shall constitute a waiver of any objections 
to the proposed minimum capital ratios or the deadline for their 
achievement.
    (c) Decision. After the close of the national bank's or Federal 
savings association's response period, the OCC will decide, based on a 
review of the national bank's or Federal savings association's response 
and other information concerning the national bank or Federal savings 
association, whether individual minimum capital ratios should be 
established for the national bank or Federal savings association and, if 
so, the ratios and the date the requirements will become effective. The 
national bank or Federal savings association will be notified of the 
decision in writing. The notice will include an explanation of the 
decision, except for a decision not to establish individual minimum 
capital requirements for the national bank or Federal savings 
association.
    (d) Submission of plan. The decision may require the national bank 
or Federal savings association to develop and submit to the OCC, within 
a time period specified, an acceptable plan to reach the minimum capital 
ratios established for the national bank or Federal savings association 
by the date required.

[[Page 212]]

    (e) Change in circumstances. If, after the OCC's decision in 
paragraph (c) of this section, there is a change in the circumstances 
affecting the national bank's or Federal savings association's capital 
adequacy or its ability to reach the required minimum capital ratios by 
the specified date, the national bank or Federal savings association may 
propose to the OCC, or the OCC may propose to the national bank or 
Federal savings association, a change in the minimum capital ratios for 
the national bank or Federal savings association, the date when the 
minimums must be achieved, or the national bank's or Federal savings 
association's plan (if applicable). The OCC may decline to consider 
proposals that are not based on a significant change in circumstances or 
are repetitive or frivolous. Pending a decision on reconsideration, the 
OCC's original decision and any plan required under that decision shall 
continue in full force and effect.



Sec. 3.405  Relation to other actions.

    In lieu of, or in addition to, the procedures in this subpart, the 
required minimum capital ratios for a national bank or Federal savings 
association may be established or revised through a written agreement or 
cease and desist proceedings under 12 U.S.C. 1818 (b) or (c) (12 CFR 
19.0 through 19.21 for national banks and 12 CFR part 109 for Federal 
savings associations) or as a condition for approval of an application.



                          Subpart I_Enforcement

    Source: 78 FR 62269, Oct. 11, 2013, unless otherwise noted.



Sec. 3.501  Remedies.

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



                    Subpart J_Issuance of a Directive

    Source: 78 FR 62269, Oct. 11, 2013, unless otherwise noted.



Sec. 3.601  Purpose and scope.

    (a) This subpart is applicable to proceedings by the OCC to issue a 
directive under 12 U.S.C. 3907(b)(2) or 12 U.S.C. 1464(s), as 
appropriate. A directive is an order issued to a national bank or 
Federal savings association that does not have or maintain capital at or 
above the minimum ratios set forth in subpart B of this part, or 
established for the national bank or Federal savings association under 
subpart H of this part, by a written agreement under 12 U.S.C. 1818(b), 
or as a condition for approval of an application. A directive may order 
the national bank or Federal savings association to:
    (1) Achieve the minimum capital ratios applicable to it by a 
specified date;
    (2) Adhere to a previously submitted plan to achieve the applicable 
capital ratios;
    (3) Submit and adhere to a plan acceptable to the OCC describing the 
means and time schedule by which the national bank or Federal savings 
association shall achieve the applicable capital ratios;
    (4) Take other action, such as reduction of assets or the rate of 
growth of assets, or restrictions on the payment of dividends, to 
achieve the applicable capital ratios; or
    (5) A combination of any of these or similar actions.
    (b) A directive issued under this rule, including a plan submitted 
under a directive, is enforceable in the same manner and to the same 
extent as an

[[Page 213]]

effective and outstanding cease and desist order which has become final 
as defined in 12 U.S.C. 1818(k). Violation of a directive may result in 
assessment of civil money penalties in accordance with 12 U.S.C. 
3909(d).



Sec. 3.602  Notice of intent to issue a directive.

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



Sec. 3.603  Response to notice.

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



Sec. 3.604  Decision.

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



Sec. 3.605  Issuance of a directive.

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



Sec. 3.606  Change in circumstances.

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



Sec. 3.607  Relation to other administrative actions.

    A directive may be issued in addition to, or in lieu of, any other 
action authorized by law, including cease and desist proceedings, civil 
money penalties, or the conditioning or denial of

[[Page 214]]

applications. The OCC also may, in its discretion, take any action 
authorized by law, in lieu of a directive, in response to a national 
bank's or Federal savings association's failure to achieve or maintain 
the applicable minimum capital ratios.



                        Subpart K_Interpretations

    Source: 78 FR 62272, Oct. 11, 2013, unless otherwise noted.



Sec. 3.701  Capital and surplus.

    For purposes of determining statutory limits that are based on the 
amount of a national bank's capital and/or surplus, the provisions of 
this section are to be used, rather than the definitions of capital 
contained in subparts A through J of this part.
    (a) Capital. The term capital as used in provisions of law relating 
to the capital of national banks shall include the amount of common 
stock outstanding and unimpaired plus the amount of perpetual preferred 
stock outstanding and unimpaired.
    (b) Capital Stock. The term capital stock as used in provisions of 
law relating to the capital stock of national banks, other than 12 
U.S.C. 101, 177, and 178 shall have the same meaning as the term capital 
set forth in paragraph (a) of this section.
    (c) Surplus. The term surplus as used in provisions of law relating 
to the surplus of national banks means the sum of paragraphs (c)(1), 
(2), (3), and (4) of this section:
    (1) Capital surplus; undivided profits; reserves for contingencies 
and other capital reserves (excluding accrued dividends on perpetual and 
limited life preferred stock); net worth certificates issued pursuant to 
12 U.S.C. 1823(i); minority interests in consolidated subsidiaries; and 
allowances for loan and lease losses; minus intangible assets;
    (2) Mortgage servicing assets;
    (3) Mandatory convertible debt to the extent of 20 percent of the 
sum of paragraphs (a) and (c) (1) and (2) of this section;
    (4) Other mandatory convertible debt, limited life preferred stock 
and subordinated notes and debentures to the extent set forth in 
paragraph (f)(2) of this section.
    (d) Unimpaired surplus fund. The term unimpaired surplus fund as 
used in provisions of law relating to the unimpaired surplus fund of 
national banks shall have the same meaning as the term surplus set forth 
in paragraph (c) of this section.
    (e) Definitions. (1) Allowance for loan and lease losses means the 
balance of the valuation reserve on December 31, 1968, plus additions to 
the reserve charged to operations since that date, less losses charged 
against the allowance net of recoveries.
    (2) Capital surplus means the total of those accounts reflecting:
    (i) Amounts paid in in excess of the par or stated value of capital 
stock;
    (ii) Amounts contributed to the national bank other than for capital 
stock;
    (iii) Amounts transferred from undivided profits pursuant to 12 
U.S.C. 60; and
    (iv) Other amounts transferred from undivided profits.
    (3) Intangible assets means those purchased assets that are to be 
reported as intangible assets in accordance with the Instructions--
Consolidated Reports of Condition and Income (Call Report).
    (4) Limited life preferred stock means preferred stock which has a 
maturity or which may be redeemed at the option of the holder.
    (5) Mandatory convertible debt means subordinated debt instruments 
which unqualifiedly require the issuer to exchange either common or 
perpetual preferred stock for such instruments by a date at or before 
the maturity of the instrument. The maturity of these instruments must 
be 12 years or less. In addition, the instrument must meet the 
requirements of paragraphs (f)(1)(i) through (v) of this section for 
subordinated notes and debentures or other requirements published by the 
OCC.
    (6) Minority interest in consolidated subsidiaries means the portion 
of equity capital accounts of all consolidated subsidiaries of the 
national bank that is allocated to minority shareholders of such 
subsidiaries.
    (7) Mortgage servicing assets means the national bank-owned rights 
to service for a fee mortgage loans that are owned by others.

[[Page 215]]

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



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

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

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

[[Page 216]]

    (b) Applicability. (1) The risk-based capital ratio derived from 
these guidelines is an important factor in the OCC's evaluation of a 
bank's capital adequacy. However, since this measure addresses only 
credit risk, the 8% minimum ratio should not be viewed as the level to 
be targeted, but rather as a floor. The final supervisory judgment on a 
bank's capital adequacy is based on an individualized assessment of 
numerous factors, including those listed in 12 CFR 3.10. With respect to 
the consideration of these factors, the OCC will give particular 
attention to any bank with significant exposure to declines in the 
economic value of its capital due to changes in interest rates. As a 
result, it may differ from the conclusion drawn from an isolated 
comparison of a bank's risk-based capital ration to the 8% minimum 
specified in these guidelines. In addition to the standards established 
by these risk-based capital guidelines, all national banks must maintain 
a minimum capital-to-total assets ratio in accordance with the 
provisions of 12 CFR part 3.
    (2) Effective December 31, 1990, these risk-based capital guidelines 
will apply to all national banks. In the interim, banks must maintain 
minimum capital-to-total assets ratios as required by 12 CFR part 3, and 
should begin preparing for the implementation of these risk-based 
capital guidelines. In this regard, each national bank that does not 
currently meet the final minimum ratio established in section 4(b)(1) of 
this appendix A should begin planning for achieving that standard.
    (3) These risk-based capital guidelines will not be applied to 
federal branches and agencies of foreign banks.
    (c) Definitions. For purposes of this appendix A, the following 
definitions apply:
    (1) Adjusted carrying value means, for purposes of section 2(c)(5) 
of this appendix A, the aggregate value that investments are carried on 
the balance sheet of the bank reduced by any unrealized gains on the 
investments that are reflected in such carrying value but excluded from 
the bank's Tier 1 capital and reduced by any associated deferred tax 
liabilities. For example, for investments held as available-for-sale 
(AFS), the adjusted carrying value of the investments would be the 
aggregate carrying value of the investments (as reflected on the 
consolidated balance sheet of the bank) less any unrealized gains on 
those investments that are included in other comprehensive income and 
that are not reflected in Tier 1 capital, and less any associated 
deferred tax liabilities. Unrealized losses on AFS nonfinancial equity 
investments must be deducted from Tier 1 capital in accordance with 
section 1(c)(10) of this appendix A. The treatment of small business 
investment companies that are consolidated for accounting purposes under 
generally accepted accounting principles is discussed in section 
2(c)(5)(ii) of this appendix A. For investments in a nonfinancial 
company that is consolidated for accounting purposes, the bank's 
adjusted carrying value of the investment is determined under the equity 
method of accounting (net of any intangibles associated with the 
investment that are deducted from the bank's Tier 1 capital in 
accordance with section 2(c)(2) of this appendix A). Even though the 
assets of the nonfinancial company are consolidated for accounting 
purposes, these assets (as well as the credit equivalent amounts of the 
company's off-balance sheet items) are excluded from the bank's risk-
weighted assets.
    (2) Allowances for loan and lease losses means the balance of the 
valuation reserve on December 31, 1968, plus additions to the reserve 
charged to operations since that date, less losses charged against the 
allowance net of recoveries.
    (3) Asset-backed commercial paper program means a program that 
primarily issues externally rated commercial paper backed by assets or 
other exposures held in a bankruptcy-remote, special-purpose entity.
    (4) Asset-backed commercial paper sponsor means a bank that:
    (i) Establishes an asset-backed commercial paper program;
    (ii) Approves the sellers permitted to participate in an asset-
backed commercial paper program;
    (iii) Approves the asset pools to be purchased by an asset-backed 
commercial paper program; or
    (iv) Administers the asset-backed commercial paper program by 
monitoring the assets, arranging for debt placement, compiling monthly 
reports, or ensuring compliance with the program documents and with the 
program's credit and investment policy.
    (5) Associated company means any corporation, partnership, business 
trust, joint venture, association or similar organization in which a 
national bank directly or indirectly holds a 20 to 50 percent ownership 
interest.
    (6) Banking and finance subsidiary means any subsidiary of a 
national bank that engages in banking- and finance-related activities.
    (7) Cash items in the process of collection means checks or drafts 
in the process of collection that are drawn on another depository 
institution, including a central bank, and that are payable immediately 
upon presentation in the country in which the reporting bank's office 
that is clearing or collecting the check or draft is located; U.S. 
Government checks that are drawn on the United States Treasury or any 
other U.S. Government or Government-sponsored agency and that are 
payable immediately upon presentation; broker's security drafts and 
commodity or bill-of-lading drafts payable immediately upon presentation 
in the United

[[Page 217]]

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

[[Page 218]]

the opinion of the OCC, gives rise to similar risks, including when-
issued securities.
    (20) Liquidity facility means a legally binding commitment to 
provide liquidity to various types of transactions, structures or 
programs. A liquidity facility that supports asset-backed commercial 
paper, in any amount, by lending to, or purchasing assets from any 
structure, program, or conduit constitutes an asset-backed commercial 
paper liquidity facility.
    (21) Multifamily residential property means any residential property 
consisting of five or more dwelling units including apartment buildings, 
condominiums, cooperatives, and other similar structures primarily for 
residential use, but not including hospitals, nursing homes, or other 
similar facilities.
    (22) Nationally recognized statistical rating organization (NRSRO) 
means an entity recognized by the Division of Market Regulation of the 
Securities and Exchange Commission (or any successor Division) 
(Commission or SEC) as a nationally recognized statistical rating 
organization for various purposes, including the Commission's uniform 
net capital requirements for brokers and dealers.
    (23) Nonfinancial equity investment means any equity investment held 
by a bank in a nonfinancial company through a small business investment 
company (SBIC) under section 302(b) of the Small Business Investment Act 
of 1958 (15 U.S.C. 682(b)) or under the portfolio investment provisions 
of Regulation K (12 CFR 211.8(c)(3)). An equity investment made under 
section 302(b) of the Small Business Investment Act of 1958 in a SBIC 
that is not consolidated with the bank is treated as a nonfinancial 
equity investment in the manner provided in section 2(c)(5)(ii)(C) of 
this appendix A. A nonfinancial company is an entity that engages in any 
activity that has not been determined to be permissible for a bank to 
conduct directly or to be financial in nature or incidental to financial 
activities under section 4(k) of the Bank Holding Company Act (12 U.S.C. 
1843(k)).
    (24) The OECD-based group of countries comprises all full members of 
the Organization for Economic Cooperation and Development (OECD) 
regardless of entry date, as well as countries that have concluded 
special lending arrangements with the International Monetary Fund (IMF) 
associated with the IMF's General Arrangements to Borrow, \1\ but 
excludes any country that has rescheduled its external sovereign debt 
within the previous five years. These countries are hereinafter referred 
to as OECD countries. A rescheduling of external sovereign debt 
generally would include any renegotiation of terms arising from a 
country's inability or unwillingness to meet its external debt service 
obligations, but generally would not include renegotiations of debt in 
the normal course of business, such as a renegotiation to allow the 
borrower to take advantage of a decline in interest rates or other 
change in market conditions.
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    \1\ As of November 1995, the OECD included the following countries: 
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, 
Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, the 
Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, 
Turkey, the United Kingdom, and the United States; and Saudi Arabia had 
concluded special lending arrangements with the IMF associated with the 
IMF's General Arrangements to Borrow.
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    (25) Original maturity means, with respect to a commitment, the 
earliest possible date after a commitment is made on which the 
commitment is scheduled to expire (i.e., it will reach its stated 
maturity and cease to be binding on either party), provided that either:
    (i) The commitment is not subject to extension or renewal and will 
actually expire on its stated expiration date; or
    (ii) If the commitment is subject to extension or renewal beyond its 
stated expiration date, the stated expiration date will be deemed the 
original maturity only if the extension or renewal must be based upon 
terms and conditions independently negotiated in good faith with the 
customer at the time of the extension or renewal and upon a new, bona 
fide credit analysis utilizing current information on financial 
condition and trends.
    (26) Preferred stock includes the following instruments: (i) 
Convertible preferred stock, which means preferred stock that is 
mandatorily convertible into either common or perpetual preferred stock; 
(ii) Intermediate-term preferred stock, which means preferred stock with 
an original maturity of at least five years, but less than 20 years; 
(iii) Long-term preferred stock, which means preferred stock with an 
original maturity of 20 years or more; and (iv) Perpetual preferred 
stock, which means preferred stock without a fixed maturity date that 
cannot be redeemed at the option of the holder, and that has no other 
provisions that will require future redemption of the issue. For 
purposes of these instruments, preferred stock that can be redeemed at 
the option of the holder is deemed to have an original maturity of the 
earliest possible date on which it may be so redeemed.
    (27) Public-sector entities include states, local authorities and 
governmental subdivisions below the central government level in an OECD 
country. In the United States, this definition encompasses a state, 
county, city, town, or other municipal corporation, a public authority, 
and generally any publicly-owned entity that is an instrumentality of a

[[Page 219]]

state or municipal corporation. This definition does not include 
commercial companies owned by the public sector. \1a\
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    \1a\ See Definition (5), Central government, for further explanation 
of commercial companies owned by the public sector.
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    (28) Reciprocal holdings of bank capital instruments means cross-
holdings or other formal or informal arrangements in which two or more 
banking organizations swap, exchange, or otherwise agree to hold each 
other's capital instruments. This definition does not include holdings 
of capital instruments issued by other banking organizations that were 
taken in satisfaction of debts previously contracted, provided that the 
reporting national bank has not held such instruments for more than five 
years or a longer period approved by the OCC.
    (29) Replacement cost means, with respect to interest rate and 
exchange rate contracts, the loss that would be incurred in the event of 
a counterparty default, as measured by the net cost of replacing the 
contract at the current market value. If default would result in a 
theoretical profit, the replacement value is considered to be zero. The 
mark-to-market process should incorporate changes in both interest rates 
and counterparty credit quality.
    (30) Residential properties means houses, condominiums, cooperative 
units, and manufactured homes. This definition does not include boats or 
motor homes, even if used as a primary residence.
    (31) Risk-weighted assets means the sum of total risk-weighted 
balance sheet assets and the total of risk-weighted off-balance sheet 
credit equivalent amounts. Risk-weighted balance sheet and off-balance 
sheet assets are calculated in accordance with section 3 of this 
appendix A.
    (32) State means any one of the several states of the United States 
of America, the District of Columbia, Puerto Rico, and the territories 
and possessions of the United States.
    (33) Subsidiary means any corporation, partnership, business trust, 
joint venture, association or similar organization in which a national 
bank directly or indirectly holds more than a 50% ownership interest. 
This definition does not include ownership interests that were taken in 
satisfaction of debts previously contracted, provided that the reporting 
bank has not held the interest for more than five years or a longer 
period approved by the OCC.
    (34) Total capital means the sum of a national bank's core (Tier 1) 
and qualifying supplementary (Tier 2) capital elements.
    (35) Unconditionally cancelable means, with respect to a commitment-
type lending arrangement, that the bank may, at any time, with or 
without cause, refuse to advance funds or extend credit under the 
facility. In the case of home equity lines of credit, the bank is deemed 
able to unconditionally cancel the commitment if it can, at its option, 
prohibit additional extensions of credit, reduce the line, and terminate 
the commitment to the full extent permitted by relevant Federal law.
    (36) United States Government or its agencies means an 
instrumentality of the U.S. Government whose debt obligations are fully 
and explicitly guaranteed as to the timely payment of principal and 
interest by the full faith and credit of the United States Government.
    (37) United States Government-sponsored agency means an agency 
originally established or chartered to serve public purposes specified 
by the United States Congress, but whose obligations are not explicitly 
guaranteed by the full faith and credit of the United States Government.
    (38) Walkaway clause means a provision in a bilateral netting 
contract that permits a nondefaulting counterparty to make a lower 
payment than it would make otherwise under the bilateral netting 
contract, or no payment at all, to a defaulter or the estate of a 
defaulter, even if the defaulter or the estate of the defaulter is a net 
creditor under the bilateral netting contract.

                    Section 2. Components of Capital.

    A national bank's qualifying capital base consists of two types of 
capital--core (Tier 1) and supplementary (Tier 2).
    (a) Tier 1 Capital. The following elements comprise a national 
bank's Tier 1 capital:
    (1) Common stockholders' equity;
    (2) Noncumulative perpetual preferred stock and related surplus; and 
\2\
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    \2\ Preferred stock issues where the dividend is reset periodically 
based upon current market conditions and the bank's current credit 
rating, including but not limited to, auction rate, money market or 
remarketable preferred stock, are assigned to Tier 2 capital, regardless 
of whether the dividends are cumulative or noncumulative.
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    (3) Minority interests in the equity accounts of consolidated 
subsidiaries, except that the following are not included in Tier 1 
capital or total capital:
    (i) Minority interests in a small business investment company or 
investment fund that holds nonfinancial equity investments and minority 
interests in a subsidiary that is engaged in a nonfinancial activities 
and is held under one of the legal authorities listed in section 
1(c)(23) of this appendix A.
    (ii) [Reserved]
    (b) Tier 2 Capital. The following elements comprise a national 
bank's Tier 2 capital:

[[Page 220]]

    (1) Allowance for loan and lease losses, up to a maximum of 1.25% of 
risk-weighted assets, \3\ subject to the transition rules in section 
4(a)(2) of this appendix A;
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    \3\ The amount of the allowance for loan and lease losses that may 
be included in capital is based on a percentage of risk-weighted assets. 
The gross sum of risk-weighted assets used in this calculation includes 
all risk-weighted assets, with the exception of the assets required to 
be deducted under section 3 in establishing risk-weighted assets (i.e., 
the assets required to be deducted from capital under section 2(c)) of 
this appendix. A banking organization may deduct reserves for loan and 
lease losses in excess of the amount permitted to be included as 
capital, as well as allocated transfer risk reserves and reserves held 
against other real estate owned, from the gross sum of risk-weighted 
assets in computing the denominator of the risk-based capital ratio.
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    (2) Cumulative perpetual preferred stock, long-term preferred stock, 
convertible preferred stock, and any related surplus, without limit, if 
the issuing national bank has the option to defer payment of dividends 
on these instruments. For long-term preferred stock, the amount that is 
eligible to be included as Tier 2 capital is reduced by 20% of the 
original amount of the instrument (net of redemptions) at the beginning 
of each of the last five years of the life of the instrument;
    (3) Hybrid capital instruments, without limit. Hybrid capital 
instruments are those instruments that combine certain characteristics 
of debt and equity, such as perpetual debt. To be included as Tier 2 
capital, these instruments must meet the following criteria: \4\
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    \4\ Mandatory convertible debt instruments that meet the 
requirements of 12 CFR 3.100(e)(5), or that have been previously 
approved as capital by the OCC, are treated as qualifying hybrid capital 
instruments.
---------------------------------------------------------------------------

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

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

    (c) Deductions from Capital. The following items are deducted from 
the appropriate portion of a national bank's capital base when 
calculating its risk-based capital ratio:
    (1) Deductions from Tier 1 Capital. The following items are deducted 
from Tier 1 capital before the Tier 2 portion of the calculation is 
made:
    (i) Goodwill;
    (ii) Other intangible assets, except as provided in section 2(c)(2) 
of this appendix A;
    (iii) Deferred tax assets, except as provided in section 2(c)(3) and 
(2)(c)(6) of this appendix A, that are dependent upon future taxable 
income, which exceed the lesser of either:
    (A) The amount of deferred tax assets that the bank could reasonably 
expect to realize within one year of the quarter-end Call Report, based 
on its estimate of future taxable income for that year; or

[[Page 221]]

    (B) 10% of Tier 1 capital, net of goodwill and all intangible assets 
other than purchased credit card relationships, mortgage servicing 
assets and non-mortgage servicing assets; and
    (iv) Credit-enhancing interest-only strips (as defined in section 
4(a)(2) of this appendix A), as provided in section 2(c)(4).
    (v) Nonfinancial equity investments as provided by section 2(c)(5) 
of this appendix A.
    (2) Qualifying intangible assets. Subject to the following 
conditions, mortgage servicing assets, nonmortgage servicing assets \6\ 
and purchased credit card relationships need not be deducted from Tier 1 
capital:
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    \6\ Intangible assets are defined to exclude IO strips receivable 
related to these mortgage and non-mortgage servicing assets. See section 
1(c)(18) of this appendix A. Consequently, IO strips receivable related 
to mortgage and non-mortgage servicing assets are not required to be 
deducted under section 2(c)(2) of this appendix A. However, credit-
enhancing interest-only strips as defined in section 4(a)(2) are 
deducted from Tier 1 capital in accordance with section 2(c)(4) of this 
appendix A. Any non credit-enhancing IO strips receivable are subject to 
a 100% risk weight under section 3(a)(4) of this appendix A.
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    (i) The total of all intangible assets that are included in Tier 1 
capital is limited to 100 percent of Tier 1 capital, of which no more 
than 25 percent of Tier 1 capital can consist of purchased credit card 
relationships and non-mortgage servicing assets in the aggregate. 
Calculation of these limitations must be based on Tier 1 capital net of 
goodwill and all other identifiable intangibles, other than purchased 
credit card relationships, mortgage servicing assets and non-mortgage 
servicing assets.
    (ii) Banks must value each intangible asset included in Tier 1 
capital at least quarterly at the lesser of:
    (A) 90 percent of the fair value of each intangible asset, 
determined in accordance with section 2(c)(2)(iii) of this appendix A; 
or
    (B) 100 percent of the remaining unamortized book value.
    (iii) The quarterly determination of the current fair value of the 
intangible asset must include adjustments for any significant changes in 
original valuation assumptions, including changes in prepayment 
estimates.
    (3) Deferred tax assets--(i) Net unrealized gains and losses on 
available-for-sale securities. Net unrealized gains and losses on 
available-for-sale securities. Before calculating the amount of deferred 
tax assets subject to the limit in section 2(c)(1)(iii) of this appendix 
A, a bank may eliminate the deferred tax effects of any net unrealized 
holding gains and losses on available-for-sale debt securities. Banks 
report these net unrealized holding gains and losses in their Call 
Reports as a separate component of equity capital, but exclude them from 
the definition of common stockholders' equity for regulatory capital 
purposes. A bank that adopts a policy to deduct these amounts must apply 
that approach consistently in all future calculations of the amount of 
disallowed deferred tax assets under section 2(c)(1)(iii) of this 
appendix A.
    (ii) Consolidated groups. The amount of deferred tax assets that a 
bank can realize from taxes paid in prior carryback years and from 
reversals of existing taxable temporary differences generally would not 
be deducted from capital. However, for a bank that is a member of a 
consolidated group (for tax purposes), the amount of carryback potential 
a bank may consider in calculating the limit on deferred tax assets 
under section 2(c)(1)(iii) of this appendix A, may not exceed the amount 
that the bank could reasonably expect to have refunded by its parent 
holding company.
    (iii) Estimated future taxable income. Estimated future taxable 
income does not include net operating loss carryforwards to be used 
during that year or the amount of existing temporary differences 
expected to reverse within the year. A bank may use future taxable 
income projections for their closest fiscal year, provided it adjusts 
the projections for any significant changes that occur or that it 
expects to occur. Such projections must include the estimated effect of 
tax planning strategies that the bank expects to implement to realize 
net operating losses or tax credit carryforwards that will otherwise 
expire during the year.
    (4) Credit-enhancing interest-only strips. Credit-enhancing 
interest-only strips, whether purchased or retained, that exceed 25% of 
Tier 1 capital must be deducted from Tier 1 capital. Purchased and 
retained credit-enhancing interest-only strips, on a non-tax adjusted 
basis, are included in the total amount that is used for purposes of 
determining whether a bank exceeds its Tier 1 capital.
    (i) The 25% limitation on credit-enhancing interest-only strips will 
be based on Tier 1 capital net of goodwill and all identifiable 
intangibles, other than purchased credit card relationships, mortgage 
servicing assets and non-mortgage servicing assets.
    (ii) Banks must value each credit-enhancing interest-only strip 
included in Tier 1 capital at least quarterly. The quarterly 
determination of the current fair value of the credit-enhancing 
interest-only strip must include adjustments for any significant changes 
in original valuation assumptions, including changes in prepayment 
estimates.
    (5) Nonfinancial equity investments--(i) General. (A) A bank must 
deduct from its Tier 1

[[Page 222]]

capital the appropriate percentage, as determined in accordance with 
Table A, of the adjusted carrying value of all nonfinancial equity 
investments held by the bank and its subsidiaries.

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

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

[[Page 223]]

    (D) To the extent the adjusted carrying value of all nonfinancial 
equity investments that the bank holds through a consolidated SBIC or in 
a nonconsolidated SBIC equals or exceeds, in the aggregate, 15 percent 
of the Tier 1 capital of the bank, the appropriate percentage of such 
amounts, as set forth in Table A, must be deducted from the bank's Tier 
1 capital. In addition, the aggregate adjusted carrying value of all 
nonfinancial equity investments held through a consolidated SBIC and in 
a nonconsolidated SBIC (including any nonfinancial equity investments 
for which no deduction is required) must be included in determining, for 
purposes of Table A the total amount of nonfinancial equity investments 
held by the bank in relation to its Tier 1 capital.
    (iii) Nonfinancial equity investments excluded. (A) Notwithstanding 
section 2(c)(5)(i) and (ii) of this appendix A, no deduction from Tier 1 
capital is required for the following:
    (1) Nonfinancial equity investments (or portion of such investments) 
made by the bank prior to March 13, 2000, and continuously held by the 
bank since March 13, 2000.
    (2) Nonfinancial equity investments made on or after March 13, 2000, 
pursuant to a legally binding written commitment that was entered into 
by the bank prior to March 13, 2000, and that required the bank to make 
the investment, if the bank has continuously held the investment since 
the date the investment was acquired.
    (3) Nonfinancial equity investments received by the bank through a 
stock split or stock dividend on a nonfinancial equity investment made 
prior to March 13, 2000, provided that the bank provides no 
consideration for the shares or interests received, and the transaction 
does not materially increase the bank's proportional interest in the 
nonfinancial company.
    (4) Nonfinancial equity investments received by the bank through the 
exercise on or after March 13, 2000, of an option, warrant, or other 
agreement that provides the bank with the right, but not the obligation, 
to acquire equity or make an investment in a nonfinancial company, if 
the option, warrant, or other agreement was acquired by the bank prior 
to March 13, 2000, and the bank provides no consideration for the 
nonfinancial equity investments.
    (B) Any excluded nonfinancial equity investments described in 
section 2(c)(5)(iii)(A) of this appendix A must be included in 
determining the total amount of nonfinancial equity investments held by 
the bank in relation to its Tier 1 capital for purposes of Table A. In 
addition, any excluded nonfinancial equity investments will be risk 
weighted at 100 percent and included in the bank's risk-weighted assets.
    (6) Netting of Deferred Tax Liability. (i) Banks may elect to deduct 
the following assets from Tier 1 capital on a basis that is net of any 
associated deferred tax liability:
    (A) Goodwill;
    (B) Intangible assets acquired due to a nontaxable purchase business 
combination, except banks may not elect to deduct from Tier 1 capital on 
a basis that is net of any associated deferred tax liability, regardless 
of the method by which they were acquired:
    (1) Purchased credit card relationships; and
    (2) Servicing assets that are includable in Tier 1 capital;
    (C) Disallowed servicing assets;
    (D) Disallowed credit-enhancing interest-only strips; and
    (E) Nonfinancial equity investments, as defined in section 1(c)(1) 
of this appendix A.
    (ii) Deferred tax liabilities netted in this manner cannot also be 
netted against deferred tax assets when determining the amount of 
deferred tax assets that are dependent upon future taxable income as 
calculated under section 2(c)(1)(iii) of this appendix A.
    (7) Deductions from total capital. The following assets are deducted 
from total capital:
    (i) Investments, both equity and debt, in unconsolidated banking and 
finance subsidiaries that are deemed to be capital of the subsidiary;\7\ 
and
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    \7\ The OCC may require deduction of investments in other 
subsidiaries and associated companies, on a case-by-case basis.
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    (ii) Reciprocal holdings of bank capital instruments.

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

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

[[Page 224]]

asset deducted from a bank's capital in computing the numerator of the 
risk-based capital ratio is not included as part of the bank's risk-
weighted assets.
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    \8\ The OCC reserves the right to require a bank to compute its 
risk-based capital ratio on the basis of average, rather than period-
end, risk-weighted assets when necessary to carry out the purposes of 
these guidelines.
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    Some of the assets on a bank's balance sheet may represent an 
indirect holding of a pool of assets, e.g., mutual funds, that 
encompasses more than one risk weight within the pool. In those 
situations, the bank may assign the asset to the risk category 
applicable to the highest risk-weighted asset that pool is permitted to 
hold pursuant to its stated investment objectives in the fund's 
prospectus. Alternatively, the bank may assign the asset on a pro rata 
basis to different risk categories according to the investment limits in 
the fund's prospectus. In either case, the minimum risk weight that may 
be assigned to such a pool is 20%. If a bank assigns the asset on a pro 
rata basis, and the sum of the investment limits in the fund's 
prospectus exceeds 100%, the bank must assign the highest pro rata 
amounts of its total investment to the higher risk category. If, in 
order to maintain a necessary degree of liquidity, the fund is permitted 
to hold an insignificant amount of its assets in short-term, highly-
liquid securities of superior credit quality (that do not qualify for a 
preferential risk weight), such securities generally will not be taken 
into account in determining the risk category into which the bank's 
holding in the overall pool should be assigned. The prudent use of 
hedging instruments by a fund to reduce the risk of its assets will not 
increase the risk weighting of the investment in that fund above the 20% 
category. However, if a fund engages in any activities that are deemed 
to be speculative in nature or has any other characteristics that are 
inconsistent with the preferential risk weighting assigned to the fund's 
assets, the bank's investment in the fund will be assigned to the 100% 
risk category. More detail on the treatment of mortgage-backed 
securities is provided in section 3(a)(3)(vi) of this appendix A.
    (a) On-Balance Sheet Assets. The following are the risk categories/
weights for on-balance sheet assets.
    (1) Zero percent risk weight. (i) Cash, including domestic and 
foreign currency owned and held in all offices of a national bank or in 
transit. Any foreign currency held by a national bank should be 
converted into U.S. dollar equivalents.
    (ii) Deposit reserves and other balances at Federal Reserve Banks.
    (iii) Securities issued by, and other direct claims on, the United 
States Government or its agencies, or the central government of an OECD 
country.
    (iv) That portion of assets directly and unconditionally guaranteed 
by the United States Government or its agencies, or the central 
government of an OECD country. \9\
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    \9\ For the treatment of privately-issued mortgage-backed securities 
where the underlying pool is comprised solely of mortgage-related 
securities issued by GNMA, see infra note 10.
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    (v) That portion of local currency claims on, or unconditionally 
guaranteed by, central governments of non-OECD countries, to the extent 
the bank has liabilities in that currency. Any amount of such claims 
that exceeds the amount of the bank's liabilities in that currency is 
assigned to the 100% risk category of section 3(a)(4) of this appendix.
    (vi) Gold bullion held in the bank's own vaults or in another bank's 
vaults on an allocated basis, to the extent it is backed by gold bullion 
liabilities.
    (vii) The book value of paid-in Federal Reserve Bank stock.
    (viii) That portion of assets and off-balance sheet transactions 
\9a\ collateralized by cash or securities issued or directly and 
unconditionally guaranteed by the United States Government or its 
agencies, or the central government of an OECD country, provided that: 
\9b\
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    \9a\ See footnote 22 in section 3(b)(5)(iii) of this appendix A 
(collateral held against derivative contracts).
    \9b\ Assets and off-balance sheet transactions collateralized by 
securities issued or guaranteed by the United States Government or its 
agencies, or the central government of an OECD country include, but are 
not limited to, securities lending transactions, repurchase agreements, 
collateralized letters of credit, such as reinsurance letters of credit, 
and other similar financial guarantees. Swaps, forwards, futures, and 
options transactions are also eligible, if they meet the collateral 
requirements. However, the OCC may at its discretion require that 
certain collateralized transactions be risk weighted at 20 percent if 
they involve more than a minimal risk.
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    (A) The bank maintains control over the collateral:
    (1) If the collateral consists of cash, the cash must be held on 
deposit by the bank or by a third-party for the account of the bank;
    (2) If the collateral consists of OECD government securities, then 
the OECD government securities must be held by the bank or by a third-
party acting on behalf of the bank;
    (B) The bank maintains a daily positive margin of collateral fully 
taking into account any change in the market value of the collateral 
held as security;
    (C) Where the bank is acting as a customer's agent in a transaction 
involving the loan or sale of securities that is collateralized by cash 
or OECD government

[[Page 225]]

securities delivered to the bank, any obligation by the bank to 
indemnify the customer is limited to no more than the difference between 
the market value of the securities lent and the market value of the 
collateral received, and any reinvestment risk associated with the 
collateral is borne by the customer; and
    (D) The transaction involves no more than minimal risk.
    (ix) Asset-backed commercial paper (ABCP) that is:
    (A) Purchased by the bank on or after September 19, 2008, from a 
Securities and Exchange Commission (SEC)-registered open-end investment 
company that holds itself out as a money market mutual fund under SEC 
Rule 2a-7 (17 CFR 270.2a-7); and
    (B) Pledged by the bank to a Federal Reserve Bank to secure 
financing from the ABCP lending facility (AMLF) established by the 
Federal Reserve Board on September 19, 2008.
    (2) 20 percent risk weight. (i) All claims on depository 
institutions incorporated in an OECD country, and all assets backed by 
the full faith and credit of depository institutions incorporated in an 
OECD country. This includes the credit equivalent amount of 
participations in commitments and standby letters of credit sold to 
other depository institutions incorporated in an OECD country, but only 
if the originating bank remains liable to the customer or beneficiary 
for the full amount of the commitment or standby letter of credit. Also 
included in this category are the credit equivalent amounts of risk 
participations in bankers' acceptances conveyed to other depository 
institutions incorporated in an OECD country. However, bank-issued 
securities that qualify as capital of the issuing bank are not included 
in this risk category, but are assigned to the 100% risk category of 
section 3(a)(4) of this appendix A.
    (ii) Claims on, or guaranteed by depository institutions, other than 
the central bank, incorporated in a non-OECD country, with a residual 
maturity of one year or less.
    (iii) Cash items in the process of collection.
    (iv) That portion of assets collateralized by cash or by securities 
issued or directly and unconditionally guaranteed by the United States 
Government or its agencies, or the central government of an OECD 
country, that does not qualify for the zero percent risk-weight 
category.
    (v) That portion of assets conditionally guaranteed by the United 
States Government or its agencies, or the central government of an OECD 
country.
    (vi) Securities issued by, or other direct claims on, United States 
Government-sponsored agencies.
    (vii) That portion of assets guaranteed by United States Government-
sponsored agencies. \10\
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    \10\ Privately issued mortgage-backed securities, e.g., CMOs and 
REMICs, where the underlying pool is comprised solely of mortgage-
related securities issued by GNMA, FNMA and FHLMC, will be treated as an 
indirect holding of the underlying assets and assigned to the 20% risk 
category of this section 3(a)(2). If the underlying pool is comprised of 
assets which attract different risk weights, e.g., FNMA securities and 
conventional mortgages, the bank should generally assign the security to 
the highest risk category appropriate for any asset in the pool. 
However, on a case-by-case basis, the OCC may allow the bank to assign 
the security proportionately to the various risk categories based on the 
proportion in which the risk categories are represented by the 
composition cash flows of the underlying pool of assets. Before the OCC 
will consider a request to proportionately risk-weight such a security, 
the bank must have current information for the reporting date that 
details the composition and cash flows of the underlying pool of assets. 
Furthermore, before a mortgage-related security will receive a risk 
weight lower than 100%, it must meet the criteria set forth in section 
3(a)(3)(vi) of this appendix A.
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    (viii) That portion of assets collateralized by the current market 
value of securities issued or guaranteed by United States Government-
sponsored agencies.
    (ix) Claims representing general obligations of any public-sector 
entity in an OECD country, and that portion of any claims guaranteed by 
any such public-sector entity. In the U.S., these obligations must meet 
the requirements of 12 CFR 1.2(b).
    (x) Claims on, or guaranteed by, official multilateral lending 
institutions or regional development institutions in which the United 
States Government is a shareholder or contributing member. \11\
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    \11\ These institutions include, but are not limited to, the 
International Bank for Reconstruction and Development (World Bank), the 
Inter-American Development Bank, the Asian Development Bank, the African 
Development Bank, the European Investments Bank, the International 
Monetary Fund and the Bank for International Settlements.
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    (xi) That portion of assets collateralized by the current market 
value of securities issued by official multilateral lending institutions 
or regional development institutions in which the United States 
Government is a shareholder or contributing member.
    (xii) That portion of local currency claims conditionally guaranteed 
by central governments of non-OECD countries, to the extent the bank has 
local currency liabilities in

[[Page 226]]

that country. Any amount of such claims that exceeds the amount of the 
bank's local currency liabilities is assigned to the 100% risk category 
of section 3(a)(4) of this appendix.
    (xiii) Claims on, or guaranteed by, a securities firm incorporated 
in an OECD country, that satisfies the following conditions:
    (A) If the securities firm is incorporated in the United States, 
then the firm must be a broker-dealer that is registered with the SEC 
and must be in compliance with the SEC's net capital regulation (17 CFR 
240.15c3(1)).
    (B) If the securities firm is incorporated in any other OECD 
country, then the bank must be able to demonstrate that the firm is 
subject to consolidated supervision and regulation, including its 
subsidiaries, comparable to that imposed on depository institutions in 
OECD countries; such regulation must include risk-based capital 
standards comparable to those applied to depository institutions under 
the Basel Capital Accord. \11a\
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    \11a\ See Accord on International Convergence of Capital Measurement 
and Capital Standards as adopted by the Basle Committee on Banking 
Regulations and Supervisory Practices (renamed as the Basel Committee on 
Banking Supervision), dated July 1988 (amended 1998).
---------------------------------------------------------------------------

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

[[Page 227]]

risk category of section 3(a)(4) of this appendix A; however, these 
loans may be included in the 50% risk category of this section 3(a)(3) 
of this appendix A if they are subject to a legally binding sales 
contract and satisfy the requirements of section 3(a)(3)(iv) of this 
appendix A.
    (iv) Loans to residential real estate builders for one-to-four 
family residential property construction, if the bank obtains sufficient 
documentation demonstrating that the buyer of the home intends to 
purchase the home (i.e., a legally binding written sales contract) and 
has the ability to obtain a mortgage loan sufficient to purchase the 
home (i.e., a firm written commitment for permanent financing of the 
home upon completion), subject to the following additional criteria:
    (A) The builder must incur at least the first 10% of the direct 
costs (i.e., actual costs of the land, labor, and material) before any 
drawdown is made under the construction loan and the construction loan 
may not exceed 80% of the sales price of the resold home;
    (B) The individual purchaser has made a substantial ``earnest money 
deposit'' of no less than 3% of the sales price of the home that must be 
subject to forfeiture by the individual purchaser if the sales contract 
is terminated by the individual purchaser; however, the earnest money 
deposit shall not be subject to forfeiture by reason of breach or 
termination of the sales contract on the part of the builder;
    (C) The earnest money deposit must be held in escrow by the bank 
financing the builder or by an independent party in a fiduciary 
capacity; the escrow agreement must provide that in the event of default 
the escrow funds must be used to defray any cost incurred relating to 
any cancellation of the sales contract by the buyer;
    (D) If the individual purchaser terminates the contract or if the 
loan fails to satisfy any other criterion under this section, then the 
bank must immediately recategorize the loan at a 100% risk weight and 
must accurately report the loan in the bank's next quarterly 
Consolidated Reports of Condition and Income (Call Report);
    (E) The individual purchaser must intend that the home will be 
owner-occupied;
    (F) The loan is made by the bank in accordance with prudent 
underwriting standards;
    (G) The loan is not more than 90 days past due, or on nonaccrual; 
and
    (H) The purchaser is an individual(s) and not a partnership, joint 
venture, trust, corporation, or any other entity (including an entity 
acting as a sole proprietorship) that is purchasing one or more of the 
homes for speculative purposes.
    (v) Loans secured by a first mortgage on multifamily residential 
properties: \11b\
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    \11b\ The portion of multifamily residential property loans that is 
sold subject to a pro rata loss sharing arrangement may be treated by 
the selling bank as sold to the extent that the sales agreement provides 
for the purchaser of the loan to share in any loss incurred on the loan 
on a pro rata basis with the selling bank. The portion of multifamily 
residential property loans sold subject to any loss sharing arrangement 
other than pro rata sharing of the loss shall be accorded the same 
treatment as any other asset sold under a