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

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

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

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

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

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AC75

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

[No. 2004-36]
RIN 1550-AB79

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

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

ACTION: Final rule.

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

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

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

SUPPLEMENTARY INFORMATION:

I. Background

A. Asset-Backed Commercial Paper Programs

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

[[Page 44909]]

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

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

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

A. Exclusion of ABCP Program Assets and Related Minority Interests

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

[[Page 44910]]

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

B. Liquidity Facilities Supporting ABCP

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

[[Page 44911]]

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

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

D. Asset Quality Test

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

[[Page 44912]]

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

E. Applicability of the Market Risk Capital Requirements

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

III. Early Amortization Capital Charge

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

[[Page 44913]]

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

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

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

IV. Elimination of Summary Sections of Rules Text

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

V. Effective Dates

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

VI. Regulatory Analysis

Riegle Community Development and Regulatory Improvement Act

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

Regulatory Flexibility Act Analysis

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

[[Page 44914]]

Paperwork Reduction Act

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

Unfunded Mandates Reform Act of 1995

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

Executive Order 12866

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

List of Subjects

12 CFR Part 3

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

12 CFR Part 208

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

12 CFR Part 225

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

12 CFR Part 325

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

12 CFR Part 567

    Capital, Reporting and recordkeeping requirements, Savings 
associations.

DEPARTMENT OF TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter 1

Authority and Issuance

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

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

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

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

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

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

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

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

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

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

Section 1. Purpose, Applicability of Guidelines and Definitions

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

[[Page 44915]]

Section 2. Components of Capital

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

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

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

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

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

[[Page 44916]]

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

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

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

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

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

* * * * *

Section 2. Definitions

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

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

FEDERAL RESERVE SYSTEM

12 CFR Chapter II

Authority and Issuance

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

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

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

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


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

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

* * * * *
    II. * * *
    A. * * *
    1. * * *
    c. Minority interest in equity accounts of consolidated 
subsidiaries. This element is included in tier 1 capital because, as 
a general rule, it represents equity that is freely available to 
absorb losses in operating subsidiaries whose assets are included in 
a bank's risk-weighted asset base. While not subject to an explicit 
sublimit within tier 1, banks are expected to avoid using minority 
interest in the equity accounts of consolidated subsidiaries as an 
avenue for introducing into their capital structures elements that 
might not otherwise qualify as tier 1 capital or that would, in 
effect, result in an excessive reliance on preferred stock within 
tier 1. Minority interests in small business investment companies, 
investment funds that hold nonfinancial equity investments (as 
defined in section II.B.5.b. of this appendix A), and subsidiaries 
engaged in nonfinancial activities, are not included in the bank's 
tier 1 or total capital base if the bank's interest in the company 
or fund is held under one of the legal authorities listed in section 
II.B.5.b. In addition, minority interests in consolidated asset-
backed commercial paper programs (ABCP) (as defined in section 
III.B.6. of this appendix A) that are sponsored by a bank are not to 
be included in the bank's tier 1 or total capital base if the bank 
excludes the consolidated assets of such programs from risk-weighted 
assets pursuant to section III.B.6. of this appendix.
* * * * *
    III. * * *
    B. * * *
    3. * * *
    a. Definitions--i. Credit derivative means a contract that 
allows one party (the

[[Page 44917]]

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

[[Page 44918]]

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

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

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

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

* * * * *

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

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

* * * * *

Section 2. Definitions * * *

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

[[Page 44919]]

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

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

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


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

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

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

[[Page 44920]]

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

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

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

[[Page 44921]]

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

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

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

* * * * *

Section 2. Definitions * * *

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

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

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Chapter III

Authority and Issuance

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

PART 325--CAPITAL MAINTENANCE

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

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

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

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

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

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

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

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

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

[[Page 44922]]

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

[[Page 44923]]

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

II. * * *

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

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

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

[[Page 44924]]

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

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

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

* * * * *

Section 2. Definitions

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

    By order of the Board of Directors.

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

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

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Chapter V

Authority and Issuance

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

PART 567--CAPITAL

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

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


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


Sec.  567.1  Definitions

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

[[Page 44925]]

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

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


Sec.  567.5  Components of Capital

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

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


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

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

    Dated: June 24, 2004.

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

BILLING CODE 4801-01-P










Last Updated 10/31/2011 communications@fdic.gov