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6000 - Bank Holding Company Act
Appendices to Subparts
Appendix A—Capital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure
I. Overview
The Board of Governors of the Federal Reserve System has adopted a
risk-based capital measure to assist in the assessment of the capital
adequacy of bank holding companies ("banking
organizations"). 1
The principal objectives of this measure are to: (i) Make regulatory
capital requirements more sensitive to differences in risk profiles
among
{{10-31-07 p.6111}}banking organizations; (ii)
factor off-balance sheet exposures into the assessment of capital
adequacy; (iii) minimize disincentives to holding liquid, low-risk
assets; and (iv) achieve greater consistency in the evaluation of the
capital adequacy of major banking organizations throughout the
world. 2
The risk-based capital guidelines include both a definition of
capital and a framework for calculating weighted risk assets by
assigning assets and off-balance sheet items to broad risk categories.
An institution's risk-based capital ratio is calculated by dividing its
qualifying capital (the numerator of the ratio) by its weighted risk
assets (the denominator). 3
The definition of qualifying capital is outlined below in section II,
and the procedures for calculating weighted risk assets are discussed
in section III. Attachment I illustrates a sample calculation of
weighted risk assets and the risk-based capital ratio.
In addition, when certain organizations that engage in trading
activities calculate their risk-based capital ratio under this appendix
A, they must also refer to appendix E of this part, which incorporates
capital charges for certain market risks into the risk-based capital
ratio. When calculating their risk-based capital ratio under this
appendix A, such organizations are required to refer to appendix E of
this part for supplemental rules to determine qualifying and excess
capital, calculate risk-weighted assets, calculate market risk
equivalent assets, and calculate risk-based capital ratios adjusted for
market risk.
The risk-based capital guidelines also establish a schedule for
achieving a minimum supervisory standard for the ratio of qualifying
capital to weighted risk assets and provide for transitional
arrangements during a phase-in period to facilitate adoption and
implementation of the measure at the end of 1992. These interim
standards and transitional arrangements are set forth in section IV.
The risk-based guidelines apply on a consolidated basis to any bank
holding company with consolidated assets of $500 million or more. The
risk-based guidelines also apply on a consolidated basis to any bank
holding company with consolidated assets of less than $500 million if
the holding company (i) is engaged in significant nonbanking activities
either directly or through a nonbank subsidiary; (ii) conducts
significant off-balance sheet activities (including securitization and
asset management or administration) either directly or through a
nonbank subsidiary; or (iii) has a material amount of debt or equity
securities outstanding (other than trust preferred securities) that are
registered with the Securities and Exchange Commission (SEC). The
Federal Reserve may apply the risk-based guidelines at its discretion
to any bank holding company, regardless of asset size, if such action
is warranted for supervisory purposes. 4
The risk-based guidelines are to be used in the inspection and
supervisory process as well as in the analysis of applications acted
upon by the Federal Reserve. Thus, in considering an application filed
by a bank holding company, the Federal Reserve will take into account
the organization's risk-based capital ratio, the reasonableness of its
capital plans, and the degree of progress it has demonstrated toward
meeting the interim and final risk-based capital standards.
The risk-based capital ratio focuses principally on broad categories
of credit risk, although the framework for assigning assets and
off-balance sheet items to risk categories does incorporate elements of
transfer risk, as well as limited instances of interest rate and market
risk. The risk-based ratio does not, however, incorporate other factors
that can affect an organization's financial condition. These
factors include overall interest rate exposure; liquidity, funding and
market risks; the quality and level of earnings;
investment
{{10-31-07 p.6112}}or loan portfolio concentrations; the
quality of loans and investments; the effectiveness of loan and
investment policies; and management's ability to monitor and control
financial and operating risks.
In addition to evaluating capital ratios, an overall assessment of
capital adequacy must take account of these other factors, including,
in particular, the level and severity of problem and classified assets.
For this reason, the final supervisory judgment on an organization's
capital adequacy may differ significantly from conclusions that might
be drawn solely from the level of the organization's risk-based capital
ratio.
The risk-based capital guidelines establish minimum
ratios of capital to weighted risk assets. In light of the
considerations just discussed, banking organizations generally are
expected to operate well above the minimum risk-based ratios. In
particular, banking organizations contemplating significant expansion
proposals are expected to maintain strong capital levels substantially
above the minimum ratios and should not allow significant diminution of
financial strength below these strong levels to fund their expansion
plans. Institutions with high or inordinate levels of risk are also
expected to operate above minimum capital standards. In all cases,
institutions should hold capital commensurate with the level and nature
of the risks to which they are exposed. Banking organizations that do
not meet the minimum risk-based standard, or that are otherwise
considered to be inadequately capitalized, are expected to develop and
implement plans acceptable to the Federal Reserve for achieving
adequate levels of capital within a reasonable period of time.
The Board will monitor the implementation and effect of these
guidelines in relation to domestic and international developments in
the banking industry. When necessary and appropriate, the Board will
consider the need to modify the guidelines in light of any significant
changes in the economy, financial markets, banking practices, or other
relevant factors.
II. Definition of Qualifying Capital for the Risk-Based Capital
Ratio
(i) A banking organization's qualifying total capital consists of
two types of capital components: "core capital elements" (tier 1
capital elements) and "supplementary capital elements" (tier 2
capital elements). These capital elements and the various limits,
restrictions, and deductions to which they are subject, are discussed
below. To qualify as an element of tier 1 or tier 2 capital, an
instrument must be fully paid up and effectively unsecured.
Accordingly, if a banking organization has purchased, or has directly
or indirectly funded the purchase of, its own capital instrument, that
instrument generally is disqualified from inclusion in regulatory
capital. A qualifying tier 1 or tier 2 capital instrument must be
subordinated to all senior indebtedness of the organization. If issued
by a bank, it also must be subordinated to claims of depositors. In
addition, the instrument must not contain or be covered by any
covenants, terms, or restrictions that are inconsistent with safe and
sound banking practices.
(ii) On a case-by-case basis, the Federal Reserve may determine
whether, and to what extent, any instrument that does not fit wholly
within the terms of a capital element set forth below, or that does not
have the characteristics or the ability to absorb losses commensurate
with the capital treatment specified below, will qualify as an element
of tier 1 or tier 2 capital. In making such a determination, the
Federal Reserve will consider the similarity of the instrument to
instruments explicitly addressed in the guidelines; the ability of the
instrument to absorb losses, particularly while the organization
operates as a going concern; the maturity and redemption features of
the instrument; and other relevant terms and factors.
(iii) The redemption of capital instruments before stated maturity
could have a significant impact on an organization's overall capital
structure. Consequently, an organization should consult with the
Federal Reserve before redeeming any equity or other capital instrument
included in tier 1 or tier 2 capital prior to stated maturity if such
redemption could have a material effect on the level or composition of
the organization's capital base. Such consultation generally would not
be necessary when the instrument is to be redeemed with the proceeds
of, or replaced by, a like amount of a capital instrument that is of
equal or higher quality with regard to terms and maturity and the
Federal Reserve considers the organization's capital position to be
fully sufficient.
{{4-29-05 p.6113}}
A. The Definition and Components of Qualifying Capital
1. Tier 1 capital. Tier 1 capital generally is defined
as the sum of core capital elements less any amounts of goodwill, other
intangible assets, interest-only strips receivables, deferred tax
assets, nonfinancial equity investments, and other items that are
required to be deducted in accordance with section II.B. of this
appendix. Tier 1 capital must represent at least 50 percent of
qualifying total capital.
a. Core capital elements (tier 1 capital elements). The
elements qualifying for inclusion in the tier 1 component of a banking
organization's qualifying total capital are:
i. Qualifying common stockholders' equity;
ii. Qualifying noncumulative perpetual preferred stock (including
related surplus);
iii. Minority interest related to qualifying common or
noncumulative perpetual preferred stock directly issued by a
consolidated U.S. depository institution or foreign bank subsidiary
(Class A minority interest); and
iv. Restricted core capital elements. The aggregate of these items
is limited within tier 1 capital as set forth in section II.A.1.b. of
this appendix. These elements are defined to include:
(1) Qualifying cumulative perpetual preferred stock (including
related surplus);
(2) Minority interest related to qualifying cumulative perpetual
preferred stock directly issued by a consolidated U.S. depository
institution or foreign bank subsidiary (Class B minority interest);
(3) Minority interest related to qualifying common stockholders'
equity or perpetual preferred stock issued by a consolidated subsidiary
that is neither a U.S. depository institution nor a foreign bank (Class
C minority interest); and
(4) Qualifying trust preferred securities.
b. Limits on restricted core capital
elements--i. Limits. (1) The aggregate amount of restricted core
capital elements that may be included in the tier 1 capital of a
banking organization must not exceed 25 percent of the sum of all core
capital elements, including restricted core capital elements, net of
goodwill less any associated deferred tax liability. Stated
differently, the aggregate amount of restricted core capital elements
is limited to one-third of the sum of core capital elements, excluding
restricted core capital elements, net of goodwill less any associated
deferred tax liability.
(2) In addition, the aggregate amount of restricted core capital
elements (other than qualifying mandatory convertible preferred
securities 5
) that may be included in the tier 1 capital of an internationally
active banking organization 6
must not exceed 15 percent of the sum of all core capital elements,
including restricted core capital elements, net of goodwill less any
associated deferred tax liability.
(3) Amounts of restricted core capital elements in excess of this
limit generally may be included in tier 2 capital. The excess amounts
of restricted core capital elements that are in the form of Class C
minority interest and qualifying trust preferred securities are subject
to further limitation within tier 2 capital in accordance with section
II.A.2.d.iv. of this appendix. A banking organization may attribute
excess amounts of restricted core capital elements first to any
qualifying cumulative perpetual preferred stock or to Class B minority
interest, and second to qualifying trust preferred securities or to
Class C minority interest, which are subject to a tier 2 sublimit.
ii. Transition.
(1) The quantitative limits for restricted core capital elements
set forth in sections II.A.1.b.i. and II.A.2.d.iv. of this appendix
become effective on March 31, 2009. Prior to that time, a banking
organization with restricted core capital elements in amounts that
cause it to exceed these limits must consult with the Federal Reserve
on a plan for ensuring that the banking organization is not unduly
relying on these elements in its capital base and,
{{4-29-05 p.6114}}where appropriate, for reducing such
reliance to ensure that the organization complies with these limits as
of March 31, 2009.
(2) Until March 31, 2009, the aggregate amount of qualifying
cumulative perpetual preferred stock (including related surplus) and
qualifying trust preferred securities that a banking organization may
include in tier 1 capital is limited to 25 percent of the sum of the
following core capital elements: qualifying common stockholders'
equity, Qualifying noncumulative and cumulative perpetual preferred
stock (including related surplus), qualifying minority interest in the
equity accounts of consolidated subsidiaries, and qualifying trust
preferred securities. Amounts of qualifying cumulative perpetual
preferred stock (including related surplus) and qualifying trust
preferred securities in excess of this limit may be included in tier 2
capital.
(3) Until March 31, 2009, internationally active banking
organizations generally are expected to limit the amount of qualifying
cumulative perpetual preferred stock (including related surplus) and
qualifying trust preferred securities included in tier 1 capital to 15
percent of the sum of core capital elements set forth in section
II.A.1.b.ii.2. of this appendix.
c. Definitions and requirements for core capital
elements--i. Qualifying common stockholders' equity.
(1) Definition. Qualifying common stockholders' equity
is limited to common stock; related surplus; and retained earnings,
including capital reserves and adjustments for the cumulative effect of
foreign currency translation, net of any treasury stock, less net
unrealized holding losses on available-for-sale equity securities with
readily determinable fair values. For this purpose, net unrealized
holding gains on such equity securities and net unrealized holding
gains (losses) on available-for-sale debt securities are not included
in qualifying common stockholders' equity.
(2) Restrictions on terms and features. A capital
instrument that has a stated maturity date or that has a preference
with regard to liquidation or the payment of dividends is not deemed to
be a component of qualifying common stockholders' equity, regardless
of whether or not it is called common equity. Terms or features that
grant other preferences also may call into question whether the capital
instrument would be deemed to be qualifying common stockholders'
equity. Features that require, or provide significant incentives for,
the issuer to redeem the instrument for cash or cash equivalents will
render the instrument ineligible as a component of qualifying common
stockholders' equity.
(3) Reliance on voting common stockholders' equity.
Although section II.A.1. of this appendix allows for the inclusion of
elements other than common stockholders' equity within tier 1 capital,
voting common stockholders' equity, which is the most desirable
capital element from a supervisory standpoint, generally should be the
dominant element within tier 1 capital. Thus, banking organizations
should avoid over-reliance on preferred stock and nonvoting elements
within tier 1 capital. Such nonvoting elements can include portions of
common stockholders' equity where, for example, a banking organization
has a class of nonvoting common equity, or a class of voting common
equity that has substantially fewer voting rights per share than
another class of voting common equity. Where a banking organization
relies excessively on nonvoting elements within tier 1 capital, the
Federal Reserve generally will require the banking organization to
allocate a portion of the nonvoting elements to tier 2 capital.
ii. Qualifying perpetual preferred stock.
(1) Qualifying requirements. Perpetual preferred stock
qualifying for inclusion in tier 1 capital has no maturity date and
cannot be redeemed at the option of the holder. Perpetual preferred
stock will qualify for inclusion in tier 1 capital only if it can
absorb losses while the issuer operates as a going concern.
(2) Restrictions on terms and features. Perpetual
preferred stock included in tier 1 capital may not have any provisions
restricting the banking organization's ability or legal right to defer
or waive dividends, other than provisions requiring prior or concurrent
deferral or waiver of payments on more junior instruments, which the
Federal Reserve generally expects in such instruments consistent with
the notion that the most junior capital elements should absorb losses
first. Dividend deferrals or waivers for preferred stock, which the
Federal Reserve expects will occur either voluntarily or at its
direction when an organization is in a weakened condition, must not be
subject to arrangements that would diminish the ability of the deferral
to shore up the banking organization's resources. Any
{{4-29-05 p.6115}}perpetual preferred stock with a feature
permitting redemption at the option of the issuer may qualify as tier 1
capital only if the redemption is subject to prior approval of the
Federal Reserve. Features that require, or create significant
incentives for the issuer to redeem the instrument for cash or cash
equivalents will render the instrument ineligible for inclusion in tier
1 capital. For example, perpetual preferred stock that has a
credit-sensitive dividend feature--that is, a dividend rate that is
reset periodically based, in whole or in part, on the banking
organization's current credit standing--generally does not qualify for
inclusion in tier 1 capital. 7
Similarly, perpetual preferred stock that has a dividend rate step-up
or a market value conversion feature--that is, a feature whereby the
holder must or can convert the preferred stock into common stock at the
market price prevailing at the time of conversion--generally does not
qualify for inclusion in tier 1
capital. 8
Perpetual preferred stock that does not qualify for inclusion in tier 1
capital generally will qualify for inclusion in tier 2 capital.
(3) Noncumulative and cumulative features. Perpetual
preferred stock that is noncumulative generally may not permit the
accumulation or payment of unpaid dividends in any form, including in
the form of common stock. Perpetual preferred stock that provides for
the accumulation or future payment of unpaid dividends is deemed to be
cumulative, regardless of whether or not it is called noncumulative.
iii. Qualifying minority interest. Minority interest in
the common and preferred stockholders' equity accounts of a
consolidated subsidiary (minority interest) represents stockholders'
equity associated with common or preferred equity instruments issued by
a banking organization's consolidated subsidiary that are held by
investors other than the banking organization. Minority interest is
included in tier 1 capital because, as a general rule, it represents
equity that is freely available to absorb losses in the issuing
subsidiary. Nonetheless, minority interest typically is not available
to absorb losses in the banking organization as a whole, a feature that
is a particular concern when the minority interest is issued by a
subsidiary that is neither a U.S. depository institution nor a foreign
bank. For this reason, this appendix distinguishes among three types of
qualifying minority interest. Class A minority interest is minority
interest related to qualifying common and noncumulative perpetual
preferred equity instruments issued directly (that is, not through a
subsidiary) by a consolidated U.S. depository
institution 9
or foreign bank 10
subsidiary of a banking organization. Class A minority interest is not
subject to a formal limitation within tier 1 capital. Class B minority
interest is minority interest related to qualifying cumulative
perpetual preferred equity instruments issued directly by a
consolidated U.S. depository institution or foreign bank subsidiary of
a banking organization. Class B minority interest is a restricted core
capital element subject to the limitations set forth in section
II.A.1.b.i. of this appendix, but is not subject to a tier 2 sub-limit.
Class C minority interest is minority interest related to qualifying
common or perpetual preferred stock issued by a banking organization's
consolidated subsidiary that is neither a U.S. depository institution
nor a foreign bank. Class C minority interest is eligible for inclusion
in tier 1 capital as a restricted core capital element and is subject
to the limitations set forth in sections II.A.1.b.i. and II.A.2.d.iv.
of this appendix. Minority interest in small business investment
companies, investment funds that hold nonfinancial equity investments
(as defined in section II.B.5.b. of this appendix), and subsidiaries
engaged in nonfinancial activities are not included in the banking
organization's tier 1 or total capital if the banking
organization's
{{4-29-05 p.6116}}interest in the company or fund is held
under one of the legal authorities listed in section II.B.5.b. of this
appendix. In addition, minority interest in consolidated asset-backed
commercial paper programs (ABCP) (as defined in section III.B.6. of
this appendix) that are sponsored by a banking organization are not
included in the organization's tier 1 or total capital if the
organization excludes the consolidated assets of such programs from
risk-weighted assets pursuant to section III.B.6. of this appendix.
iv. Qualifying trust preferred securities.
(1) A banking organization that wishes to issue trust preferred
securities and include them in tier 1 capital must first consult with
the Federal Reserve. Trust preferred securities are defined as undated
preferred securities issued by a trust or similar entity sponsored (but
generally not consolidated) by a banking organization that is sole
common equity holder of the trust. Qualifying trust preferred
securities must allow for dividends to be deferred for at least twenty
consecutive quarters without an event of default, unless an event of
default leading to acceleration permitted under section II.A.1.c.iv.(2)
has occurred. The required notification period for such deferral must
be reasonably short, no more than 15 business days prior to the payment
date. Qualifying trust preferred securities are otherwise subject to
the same restrictions on terms and features as qualifying perpetual
preferred stock under section II.A.1.c.ii.(2) of this appendix.
(2) The sole asset of the trust must be a junior subordinated note
issued by the sponsoring banking organization that has a minimum
maturity of thirty years, is subordinated with regard to both
liquidation and priority of periodic payments to all senior and
subordinated debt of the sponsoring banking organization (other than
other junior subordinated notes underlying trust preferred securities).
Otherwise the terms of a junior subordinated note must mirror those of
the preferred securities issued by the
trust. 11
The note must comply with section II.A.2.d. of this appendix and the
Federal Reserve's subordinated debt policy statement set forth in 12
CFR 250.166 12
except that the note may provide for an event of default and the
acceleration of principal and accrued interest upon (a) nonpayment of
interest for 20 or more consecutive quarters or (b) termination of the
trust without redemption of the trust preferred securities,
distribution of the notes to investors, or assumption of the obligation
by a successor to the banking organization.
(3) In the last five years before the maturity of the note, the
outstanding amount of the associated trust preferred securities is
excluded from tier 1 capital and included in tier 2 capital, where the
trust preferred securities are subject to the amortization provisions
and quantitative restrictions set forth in section II.A.2.d.iii. and
iv. of this appendix as if the trust preferred securities were
limited-life preferred stock.
2. Supplementary capital elements (Tier 2 capital
elements). The Tier 2 component of an institution's qualifying
capital may consist of the following items that are defined as
supplementary capital elements:
(i) Allowance for loan and lease losses (subject to limitations
discussed below);
(ii) Perpetual preferred stock and related surplus (subject to
conditions discussed below);
{{4-29-05 p.6117}}
(iii) Hybrid capital instruments (as defined below), perpetual
debt, and mandatory convertible debt securities;
(iv) Term subordinated debt and intermediate-term preferred stock,
including related surplus (subject to limitations discussed below);
(v) Unrealized holding gains on equity securities (subject to
limitations discussed in section II.A.2.e. of this appendix).
The maximum amount of tier 2 capital that may be included in an
institution's qualifying total capital is limited to 100 percent of
tier 1 capital (net of goodwill, other intangible assets, interest-only
strips receivables and nonfinancial equity investments that are
required to be deducted in accordance with section II.B. of
this appendix A).
The elements of supplementary capital are discussed in greater
detail below.
a. Allowance for loan and lease losses. Allowances
for loan and lease losses are reserves that have been established
through a charge against earnings to absorb future losses on loans or
lease financing receivables. Allowances for loan and lease losses
exclude "allocated transfer risk
reserves," 13
and reserves created against identified losses.
During the transition period, the risk-based capital guidelines
provide for reducing the amount of this allowance that may be included
in an institution's total capital. Initially, it is unlimited. However,
by year-end 1990, the amount of the allowance for loan and lease losses
that will qualify as capital will be limited to 1.5 percent of an
institution's weighted risk assets. By the end of the transition
period, the amount of the allowance qualifying for inclusion in Tier 2
capital may not exceed 1.25 percent of weighted risk
assets. 14
b. Perpetual preferred stock. Perpetual preferred
stock (and related surplus) that meets the requirements set forth in
section II.A.1.c.ii.(1) of this appendix is eligible for inclusion in
tier 2 capital without
limit. 15
c. Hybrid capital instruments, perpetual debt, and mandatory
convertible debt securities. Hybrid capital instruments include
instruments that are essentially permanent in nature and that have
certain characteristics of both equity and debt. Such instruments may
be included in Tier 2 without limit. The general criteria hybrid
capital instruments must meet in order to qualify for inclusion in Tier
2 capital are listed below:
(1) The instrument must be unsecured; fully paid-up and
subordinated to general creditors. If issued by a bank, it must also be
subordinated to claims or depositors.
(2) The instrument must not be redeemable at the option of the
holder prior to maturity, except with the prior approval of the Federal
Reserve. (Consistent with the Board's criteria for perpetual debt and
mandatory convertible securities, this requirement implies that holders
of such instruments may not accelerate the payment of principal except
in the event of bankruptcy, insolvency, or reorganization.)
(3) The instrument must be available to participate in losses while
the issuer is operating as a going concern. (Term subordinated debt
would not meet this requirement.) To satisfy this requirement, the
instrument must convert to common or perpetual preferred stock in the
event that the accumulated losses exceed the sum of the retained
earnings and capital surplus accounts of the issuer.
(4) The instrument must provide the option for the issuer to defer
interest payments if: a) the issuer does not report a profit in the
preceding annual period (defined as combined
{{4-29-05 p.6118}}profits for the most recent four
quarters), and b) the issuer eliminates cash dividends on
common and preferred stock.
Perpetual debt and mandatory convertible debt securities that meet
the criteria set forth in 12 CFR
Part 225, appendix B, also qualify as unlimited elements of
Tier 2 capital for bank holding companies.
d. Subordinated debt and intermediate-term preferred
stock--i. Five-year minimum maturity. Subordinated debt and
intermediate-term preferred stock must have an original weighted
average maturity of at least five years to qualify as tier 2 capital.
If the holder has the option to require the issuer to redeem, repay, or
repurchase the instrument prior to the original stated maturity,
maturity would be defined, for risk-based capital purposes, as the
earliest possible date on which the holder can put the instrument back
to the issuing banking organization.
ii. Other restrictions on subordinated debt.
Subordinated debt included in tier 2 capital must comply with the
Federal Reserve's subordinated debt policy statement set forth in 12
CFR 250.166. 16
Accordingly, such subordinated debt must meet the following
requirements:
(1) The subordinated debt must be unsecured.
(2) The subordinated debt must clearly state on its face that it is
not a deposit and is not insured by a Federal agency.
(3) The subordinated debt must not have credit-sensitive features
or other provisions that are inconsistent with safe and sound banking
practice.
(4) Subordinated debt issued by a subsidiary U.S. depository
institution or foreign bank of a bank holding company must be
subordinated in right of payment to the claims of all the
institution's general creditors and depositors, and generally must not
contain provisions permitting debt holders to accelerate payment of
principal or interest upon the occurrence of any event other than
receivership of the institution. Subordinated debt issued by a bank
holding company or its subsidiaries that are neither U.S. depository
institutions nor foreign banks must be subordinated to all senior
indebtedness of the issuer; that is, the debt must be subordinated at a
minimum to all borrowed money, similar obligations arising from
off-balance sheet guarantees and direct credit substitutes, and
obligations associated with derivative products such as interest rate
and foreign exchange contracts, commodity contracts, and similar
arrangements.
Subordinated debt issued by a bank holding company or any of its
subsidiaries that is not a U.S. depository institution or foreign bank
must not contain provisions permitting debt holders to accelerate the
payment of principal or interest upon the occurrence of any event other
than the bankruptcy of the bank holding company or the receivership of
a major subsidiary depository institution. Thus, a provision permitting
acceleration in the event that any other affiliate of the bank holding
company issuer enters into bankruptcy or receivership makes the
instrument ineligible for inclusion in tier 2 capital.
iii. Discounting in last five years. As a limited-life
capital instrument approaches maturity, it begins to take on
characteristics of a short-term obligation. For this reason, the
outstanding amount of term subordinated debt and limited-life preferred
stock eligible for inclusion in tier 2 capital is reduced, or
discounted, as these instruments approach maturity: one-fifth of the
outstanding amount is excluded each year during the instrument's last
five years before maturity. When remaining maturity is less than one
year, the instrument is excluded from tier 2 capital.
iv. Limits. The aggregate amount of term subordinated
debt (excluding mandatory convertible debt) and limited-life preferred
stock as well as, beginning March 31, 2009, qualifying trust preferred
securities and Class C minority interest in excess of the limits set
forth in section II.A.1.b.i. of this appendix that may be included in
tier 2 capital is limited to 50 percent of tier 1 capital (net of
goodwill and other intangible assets required to be deducted in
accordance with section II.B.1.b. of this appendix). Amounts of
these
{{4-29-05 p.6119}}instruments in excess of this limit,
although not included in tier 2 capital, will be taken into account by
the Federal Reserve in its overall assessment of a banking
organization's funding and financial condition.
B. Deductions from Capital and Other Adjustments
Certain assets are deducted from an organization's capital for the
purpose of calculating the risk-based capital
ratio. 17
These assets include:
(i)(a) Goodwill--deducted from the sum of core capital elements.
(b) Certain identifiable intangible assets, that is, intangible
assets other than goodwill--deducted from the sum of core capital
elements in accordance with section II.B.1.b. of this appendix.
(c) Certain credit-enhancing interest-only strips
receivables--deducted from the sum of core capital elements in
accordance with sections II.B.1.c. through e. of this appendix.
(ii) Investments in banking and finance subsidiaries that are not
consolidated for accounting or supervisory purposes, and investments in
other designated subsidiaries or associated companies at the discretion
of the Federal Reserve--deducted from total capital components (as
described in greater detail below).
(iii) Reciprocal holdings of capital instruments of banking
organizations--deducted from total capital components.
(v) Nonfinancial equity investments--portions are deducted from the
sum of core capital elements in accordance with section
II.B.5 of this appendix A.
(iv) Deferred tax assets--portions are deducted from the sum of
core capital elements in accordance with section II.B.4. of this
appendix A.
1. Goodwill, other intangible assets, and residual
interests.--a. Goodwill. Goodwill is an intangible asset that
represents the excess of the purchase price over the fair market value
of identifiable assets acquired less liabilities assumed in
acquisitions accounted for under the purchase method of accounting. Any
goodwill carried on the balance sheet of a bank holding company after
December 31, 1992, will be deducted from the sum of core capital
elements in determining Tier 1 capital for ratio calculation purposes.
Any goodwill in existence before March 12, 1988, is
"grandfathered" during the transition period and is not deducted
from core capital elements until after December 31, 1992. However, bank
holding company goodwill acquired as a result of a merger or
acquisition that was consummated on or after March 12, 1988, is
deducted immediately.
b. Other intangible assets. i. All servicing assets,
including servicing assets on assets other than mortgages (i.e.,
nonmortgage servicing assets) are included in this appendix as
identifiable intangible assets. The only types of identifiable
intangible assets that may be included in, that is, not deducted from,
an organization's capital are readily marketable mortgage servicing
assets, nonmortgage servicing assets, and purchased credit card
relation-ships. The total amount of these assets that may be included
in capital is subject to the limitations described below in sections
II.B.1.d. and e. of this appendix.
ii. The treatment of identifiable intangible assets set forth in
this section generally will be used in the calculation of a bank
holding company's capital ratios for supervisory and applications
purposes. However, in making an overall assessment of a bank holding
company's capital adequacy for applications purposes, the Board may,
if it deems appropriate, take into account the quality and composition
of an organization's capital, together with the quality and value of
its tangible and intangible assets.
c. Credit-enhancing interest-only strips receivables
(I/Os) i. Credit-enhancing I/Os are on-balance sheet assets that,
in form or in substance, represent a contractual right to receive some
or all of the interest due on transferred assets and expose the bank
holding company to credit risk directly or indirectly associated with
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. Such I/Os, whether
purchased or retained, including other similar "spread" assets,
may be included in, that is, not deducted from, a bank holding
company's capital subject to the limitations described below in
sections II.B.1.d. and e. of this appendix.
ii. Both purchased and retained credit-enhancing I/Os, on a non-tax
adjusted basis, are included in the total amount that is used for
purposes of determining whether a bank
{{4-29-05 p.6120}}holding company exceeds the tier 1
limitation described below in this section. In determining whether an
I/O or other types of spread assets serve as a credit enhancement, the
Federal Reserve will look to the economic substance of the transaction.
d. Fair value limitation. The amount of mortgage
servicing assets, nonmortgage servicing assets, and purchased credit
card relationships that a bank holding company may include in capital
shall be the lesser of 90 percent of their fair value, as determined in
accordance with section II.B.1.f. of this appendix, or 100 percent of
their book value, as adjusted for capital purposes in accordance with
the instructions to the Consolidated Financial Statements for Bank
Holding Companies (FR Y--9C Report). The amount of credit-enhancing
I/Os that a bank holding company may include in capital shall be its
fair value. If both the application of the limits on mortgage servicing
assets, nonmortgage servicing assets, and purchased credit card
relationships and the adjustment of the balance sheet amount for these
assets would result in an amount being deducted from capital, the bank
holding company would deduct only the greater of the two amounts from
its core capital elements in determining tier 1 capital.
e. Tier 1 capital limitation. i. The total amount of
mortgage servicing assets, nonmortgage servicing assets, and purchased
credit card relationships that may be included in capital, in the
aggregate, cannot exceed 100 percent of tier 1 capital. Nonmortgage
servicing assets and purchased credit care relationships are subject,
in the aggregate, to a separate sublimit of 25 percent of tier 1
capital. In addition, the total amount of credit-enhancing I/Os (both
purchased and retained) that may be included in capital cannot exceed
25 percent of tier 1 capital. 18
ii. For purposes of calculating these limitations on mortgage
servicing assets, nonmortgage servicing assets, purchased credit card
relationships, and credit-enhancing I/Os, tier 1 capital is defined as
the sum of core capital elements, net of goodwill, and net of all
identifiable intangible assets other than mortgage servicing assets,
nonmortgage servicing assets, and purchased credit card relationships,
but prior to the deduction of any disallowed mortgage servicing assets,
any disallowed nonmortgage servicing assets, any disallowed purchased
credit card relationships, any disallowed credit-enhancing I/Os (both
purchased and retained), any disallowed deferred tax assets, and any
nonfinancial equity investments.
III. Bank holding companies may elect to deduct disallowed mortgage
servicing assets, disallowed nonmortgage servicing assets, and
disallowed credit-enhancing I/Os (both purchased and retained) on a
basis that is net of any associated deferred tax liability. Deferred
tax liabilities netted in this manner cannot also be netted against
deferred-tax assets when determining the amount of deferred-tax assets
that are dependent upon future taxable income.
f. Valuation. Bank holding companies must review the
book value of all intangible assets at least quarterly and make
adjustments to these values as necessary. The fair value of mortgage
servicing assets, nonmortgage servicing assets, purchased credit card
relationships, and credit-enhancing I/Os also must be determined at
least quarterly. This determination shall include adjustments for any
significant changes in original valuation assumptions, including
changes in prepayment estimates or account attrition rates. Examiners
will review both the book value and the fair value assigned to these
assets, together with supporting documentation, during the inspection
process. In addition, the Federal Reserve may require, on a
case-by-case basis, an independent valuation of a bank holding
company's intangible assets or credit-enhancing I/Os.
g. Growing organizations. Consistent with long-standing
Board policy, banking organizations experiencing substantial growth,
whether internally or by acquisition, are expected to maintain strong
capital positions substantially above minimum supervisory levels,
without significant reliance on intangible assets or credit-enhancing
I/Os.
2. Investments in certain subsidiaries.--a. Unconsolidated
banking or finance
{{4-29-05 p.6120.01}}subsidiaries. The aggregate amount
of investments in banking or finance
subsidiaries 19
whose financial statements are not consolidated for accounting or
regulatory reporting purposes, regardless of whether the investment is
made by the parent bank holding company or its direct or indirect
subsidiaries, will be deducted from the consolidated parent banking
organization's total capital
components. 20
Generally, investments for this purpose are defined as equity and debt
capital investments and any other instruments that are deemed to be
capital in the particular subsidiary.
Advances (that is, loans, extensions of credit, guarantees,
commitments, or any other forms of credit exposure) to the subsidiary
that are not deemed to be capital will generally not be deducted from
an organization's capital. Rather, such advances generally will be
included in the parent banking organization's consolidated assets and
be assigned to the 100 percent risk category, unless such obligations
are backed by recognized collateral or guarantees, in which case they
will be assigned to the risk category appropriate to such collateral or
guarantees. These advances may, however, also be deducted from the
consolidated parent banking organization's capital if, in the judgment
of the Federal Reserve, the risks stemming from such advances are
comparable to the risks associated with capital investments or if the
advances involve other risk factors that warrant such an adjustment to
capital for supervisory purposes. These other factors could include,
for example, the absence of collateral support.
Inasmuch as the assets of unconsolidated banking and finance
subsidiaries are not fully reflected in a banking organization's
consolidated total assets, such assets may be viewed as the equivalent
of off-balance sheet exposures since the operations of an
unconsolidated subsidiary could expose the parent organization and its
affiliates to considerable risk. For this reason, it is generally
appropriate to view the capital resources invested in these
unconsolidated entities as primarily supporting the risks inherent in
these off-balance sheet assets, and not generally available to support
risks or absorb losses elsewhere in the organization.
b. Other subsidiaries and investments. The deduction
of investments, regardless of whether they are made by the parent bank
holding company or by its direct or indirect subsidiaries, from a
consolidated banking organization's capital will also be applied in the
case of any subsidiaries, that, while consolidated for accounting
purposes, are not consolidated for certain specified supervisory or
regulatory purposes, such as to facilitate functional regulation. For
this purpose, aggregate capital investments (that is, the sum of any
equity or debt instruments that are deemed to be capital) in these
subsidiaries will be deducted from the consolidated parent banking
organization's total capital
components. 21
Advances (that is, loans, extensions of credit, guarantees,
commitments, or any other forms of credit exposure) to such
subsidiaries that are not deemed to be capital will generally not be
deducted from capital. Rather, such advances will normally be included
in the parent banking organization's consolidated assets and assigned
to the 100 percent risk category, unless such obligations are backed by
recognized collateral or guarantees, in which case they will be
assigned to the risk category appropriate to such collateral or
guarantees. These advances may, however, be deducted from the
consolidated parent banking organization's capital if, in the judgment
of the Federal Reserve, the risks stemming from such advances are
comparable to the risks associated with capital investments or if such
advances involve other risk factors that warrant such an
adjustment
{{4-29-05 p.6120.02}}to capital for supervisory purposes.
These other factors could include, for example, the absence of
collateral support. 22
In general, when investments in a consolidated subsidiary are
deducted from a consolidated parent banking organization's capital, the
subsidiary's assets will also be excluded from the consolidated assets
of the parent banking organization in order to assess the latter's
capital adequacy. 23
The Federal Reserve may also deduct from a banking organization's
capital, on a case-by-case basis, investments in certain other
subsidiaries in order to determine if the consolidated banking
organization meets minimum supervisory capital requirements without
reliance on the resources invested in such subsidiaries.
The Federal Reserve will not automatically deduct investments in
other unconsolidated subsidiaries or investments in joint ventures and
associated companies. 24
Nonetheless, the resources invested in these entities, like investments
in unconsolidated banking and finance subsidiaries, support assets not
consolidated with the rest of the banking organization's activities
and, therefore, may not be generally available to support additional
leverage or absorb losses elsewhere in the banking organization.
Moreover, experience has shown that banking organizations stand behind
the losses of affiliated institutions, such as joint ventures and
associated companies, in order to protect the reputation of the
organization as a whole. In some cases, this has led to losses that
have exceeded the investments in such organizations.
For this reason, the Federal Reserve will monitor the level and
nature of such investments for individual banking organizations and
may, on a case-by-case basis, deduct such investments from total
capital components, apply an appropriate risk-weighted capital charge
against the organization's proportionate share of the assets of its
associated companies, require a line-by-line consolidation of the
entity (in the event that the parent's control over the entity makes it
the functional equivalent of a subsidiary), or otherwise require the
organization to operate with a risk-based capital ratio above the
minimum.
In considering the appropriateness of such adjustments or actions,
the Federal Reserve will generally take into account whether:
(1) The parent banking organization has significant influence over
the financial or managerial policies or operations of the subsidiary,
joint venture, or associated company;
(2) The banking organization is the largest investor in the
affiliated company; or
(3) Other circumstances prevail that appear to closely tie the
activities of the affiliated company to the parent banking
organization.
3. Reciprocal holdings of banking organizations' capital
instruments. Reciprocal holdings of banking organizations'
capital instruments (that is, instruments that qualify as Tier 1 or
Tier 2 capital) will be deducted from an organization's total capital
components for the purpose of determining the numerator of the
risk-based capital ratio.
Reciprocal holdings are cross-holdings resulting from formal or
informal arrangements in which two or more banking organizations swap,
exchange, or otherwise agree to hold each other's capital instruments.
Generally, deductions will be limited to intentional cross-holdings. At
present, the Board does not intend to require banking organizations to
deduct nonreciprocal holdings of such capital
instruments. 25
{{4-29-05 p.6120.02-A}}
4. Deferred-tax assets. a. The amount of deferred-tax
assets that is dependent upon future taxable income, net of the
valuation allowance for deferred-tax assets, that may be included in,
that is, not deducted from, a bank holding company's capital may not
exceed the lesser of:
i. the amount of these deferred-tax assets that the bank holding
company is expected to realize within one year of the calendar
quarter-end date, based on its projections of future taxable income for
that year, 26
or
ii. 10 percent of Tier 1 capital.
b. The reported amount of deferred-tax assets, net of any valuation
allowance for deferred-tax assets, in excess of the lesser of these two
amounts is to be deducted from a banking organization's core capital
elements in determining tier 1 capital. For purposes of calculating the
10 percent limitation, tier 1 capital is defined as the sum of core
capital elements, net of goodwill, and net of all identifiable
intangible assets other than mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships, but prior to
the deduction of any disallowed mortgage servicing assets, any
disallowed nonmortgage servicing assets, any disallowed purchased
credit card relationships, any disallowed credit-enhancing I/Os, any
disallowed deferred-tax assets, and any nonfinancial equity
investments. There generally is no limit in tier 1 capital on the
amount of deferred-tax assets that can be realized from taxes paid in
prior carry-back years or from future reversals of existing taxable
temporary differences.
5. Nonfinancial equity investments--a. General.
A bank holding company must deduct from its core capital elements
the sum of the appropriate percentages (as determined below) of the
adjusted carrying value of all nonfinancial equity investments held by
the parent bank holding company or by its direct or indirect
subsidiaries. For purposes of this section II.B.5, investments held by
a bank holding company include all investments held directly or
indirectly by the bank holding company or any of its subsidiaries.
b. Scope of nonfinancial equity investments. A
nonfinancial equity investment means any equity investment held by the
bank holding company: under the merchant banking authority of section
4(k)(4)(H) of the BHC Act and subpart J of the Board's Regulation Y
(12 CFR 225.175 et seq.); under section 4(c)(6) or 4(c)(7) of BHC Act
in a nonfinancial company or in a company that makes investments in
nonfinancial companies; in a nonfinancial company through a small
business investment company (SBIC) under section 302(b) of the Small
Business Investment Act of 1958; 27
in a nonfinancial company under the portfolio investment provisions of
the Board's Regulation K (12 CFR 211.8(c)(3)); or in a nonfinancial
company under section 24 of the Federal Deposit Insurance Act (other
than section 24(f)). 28
A nonfinancial company is an entity that engages in any activity that
has not been determined to be financial in nature or incidental to
financial activities under section 4(k) of the Bank Holding Company Act
(12 U.S.C. 1843(k)).
{{4-29-05 p.6120.02-B}}
c. Amount of deduction from core capital. i. The bank
holding company must deduct from its core capital elements the sum of
the appropriate percentages, as set forth in Table 1, of the adjusted
carrying value of all nonfinancial equity investments held by the bank
holding company. The amount of the percentage deduction increases as
the aggregate amount of nonfinancial equity investments held by the
bank holding company increases as a percentage of the bank holding
company's Tier 1 capital.
TABLE 1.—DEDUCTION FOR NONFINANCIAL EQUITY
INVESTMENTS
| Aggregate
adjusted carrying value of all nonfinancial equity investments held
directly or indirectly by the bank holding company (as a percentage
of the Tier 1 capital of the parent banking
organization)1 |
Deduction from CoreCapital Elements (as
apercentage of the adjusted carrying valueof the
investment) |
|---|
| Less than 15 percent |
8
percent. |
| 15 percent to 24.99 percent |
12
percent. |
| 25 percent and above |
25 percent.
|
1For purposes of calculating the adjusted carrying
value of nonfinancial equity investments as a percentage of Tier 1
capital, Tier 1 capital is defined as the sum of core capital elements
net of goodwill and net of all identifiable intangible assets other
than mortgage servicing assets, nonmortgage servicing assets and
purchased credit card relationships, but prior to the deduction for any
disallowed mortgage servicing assets, any disallowed nonmortgage
servicing assets, any disallowed purchased credit card relationships,
any disallowed credit enhancing I/Os, (both purchased and retained),
any disallowed deferred tax assets, and any nonfinancial equity
investments.
ii. These deductions are applied on a marginal basis to the
portions of the adjusted carrying value of nonfinancial equity
investments that fall within the specified ranges of the parent holding
company's Tier 1 capital. For example, if the adjusted carrying value
of all nonfinancial equity investments held by a bank holding company
equals 20 percent of the Tier 1 capital of the bank holding company,
then the amount of the deduction would be 8 percent of the adjusted
carrying value of all investments up to 15 percent of the company's
Tier 1 capital, and 12 percent of the adjusted carrying value of all
investments in excess of 15 percent of the company's Tier 1 capital.
iii. The total adjusted carrying value of any nonfinancial equity
investment that is subject to deduction under this paragraph is
excluded from the bank holding company's risk-weighted assets for
purposes of computing the denominator of the company's risk-based
capital ratio. 29
iv. As noted in section I, this appendix establishes minimum
risk-based capital ratios and banking organizations are at all
times expected to maintain capital commensurate with the level and
nature of the risks to which they are exposed. The risk to a banking
organization from nonfinancial equity investments increases with its
concentration in such investments and strong capital levels above the
minimum requirements are particularly important when a banking
organization has a high degree of concentration in nonfinancial equity
investments (e.g, in excess of 50 percent of Tier 1 capital). The
Federal Reserve intends to monitor banking organizations and apply
heightened supervision to equity investment activities as appropriate,
including where the banking organization has a high degree of
concentration in nonfinancial equity investments, to ensure that each
organization maintains capital levels that are appropriate in light of
its equity investment activities. The Federal Reserve also reserves
authority to impose a higher capital charge in any case where the
circumstances, such as the level of risk of the particular investment
or portfolio of investments, the risk management systems of the banking
organization, or other information, indicate that a higher minimum
capital requirement is appropriate.
d. SBIC investments. i. No deduction is required for
nonfinancial equity investments that are held by a bank holding company
through one or more SBICs that are consolidated with the bank holding
company or in one or more SBICs that are not consolidated with the bank
holding company to the extent that all such investments, in the
aggregate, do not exceed 15
{{2-28-06 p.6120.02-B-1}}percent of the aggregate of the bank
holding company's pro rata interests in the Tier 1 capital of its
subsidiary banks. Any nonfinancial equity investment that is held
through or in an SBIC and not required to be deducted from Tier 1
capital under this section II.B.5.d. will be assigned a 100 percent
risk-weight and included in the parent holding company's consolidated
risk-weighted assets. 30
ii. To the extent the adjusted carrying value of all nonfinancial
equity investments that a bank holding company holds through one or
more SBICs that are consolidated with the bank holding company or in
one or more SBICs that are not consolidated with the bank holding
company exceeds, in the aggregate, 15 percent of the aggregate Tier 1
capital of the company's subsidiary banks, the appropriate percentage
of such amounts (as set forth in Table 1) must be deducted from the
bank holding company's core capital elements. In addition, the
aggregate adjusted carrying value of all nonfinancial equity
investments held through a consolidated SBIC and in a non-consolidated
SBIC (including any investments for which no deduction is required)
must be included in determining, for purposes of Table 1, the total
amount of nonfinancial equity investments held by the bank holding
company in relation to its Tier 1 capital.
e. Transition provisions. No deduction under this
section II.B.5 is required to be made with respect to the
adjusted carrying value of any nonfinancial equity investment (or
portion of such an investment) that was made by the bank holding
company prior to March 13, 2000, or that was made after such date
pursuant to a binding written
commitment 31
entered into by the bank holding company prior to March 13, 2000,
provided that in either case the bank holding company has continuously
held the investment since the relevant investment
date. 32
For purposes of this section II.B.5.e, a nonfinancial equity investment
made prior to March 13, 2000, includes any shares or other interests
received by the bank holding company through a stock split or stock
dividend on an investment made prior to March 13, 2000, provided the
bank holding company provides no consideration for the shares or
interests received and the transaction does not materially increase the
bank holding company's proportional interest in the company. The
exercise on or after March 13, 2000, of options or warrants acquired
prior to March 13, 2000, is not considered to be an investment made
prior to March 13, 2000, if the bank holding company provides any
consideration for the shares or interests received upon exercise of the
options or warrants. Any nonfinancial equity investment (or portion
thereof) that is not required to be deducted
{{2-28-06 p.6120.02-B-2}}from Tier 1 capital under this section
II.B.5.e. must be included in determining the total amount of
nonfinancial equity investments held by the bank holding company in
relation to its Tier 1 capital for purposes of Table 1. In addition,
any nonfinancial equity investment (or portion thereof) that is not
required to be deducted from Tier 1 capital under this section
II.B.5.e. will be assigned a 100-percent risk weight and included in
the bank holding company's consolidated risk-weighted assets.
f. Adjusted carrying value. i. For purposes of this
section II.B.5., the "adjusted carrying value" of
investments is the aggregate value at which the investments are carried
on the balance sheet of the consolidated bank holding company reduced
by any unrealized gains on those investments that are reflected in such
carrying value but excluded from the bank holding company's Tier 1
capital and associated deferred tax liabilities. For example, for
investments held as available-for-sale (AFS), the adjusted carrying
value of the investments would be the aggregate carrying value of the
investments (as reflected on the consolidated balance sheet of the bank
holding company) less any unrealized gains on those
investments that are included in other comprehensive income and not
reflected in Tier 1 capital, and associated deferred tax
liabilities. 33
ii. As discussed above with respect to consolidated SBICs, some
equity investments may be in companies that are consolidated for
accounting purposes. For investments in a nonfinancial company that is
consolidated for accounting purposes under generally accepted
accounting principles, the parent banking organization's adjusted
carrying value of the investment is determined under the equity method
of accounting (net of any intangibles associated with the investment
that are deducted from the consolidated bank company's core capital in
accordance with section II.B.1 of this Appendix). Even though the
assets of the nonfinancial company are consolidated for accounting
purposes, these assets (as well as the credit equivalent amounts of the
company's off-balance sheet items) should be excluded from the banking
organization's risk-weighted assets for regulatory capital purposes.
g. Equity investments. For purposes of this section
II.B.5, an equity investment means any equity instrument
(including common stock, preferred stock, partnership interests,
interests in limited liability companies, trust certificates and
warrants and call options that give the holder the right to purchase an
equity instrument), any equity feature of a debt instrument (such as a
warrant or call option), and any debt instrument that is convertible
into equity where the instrument or feature is held under one of the
legal authorities listed in section II.B.5.b. of this
appendix. An investment in any other instrument (including subordinated
debt) may be treated as an equity investment if, in the judgment of the
Federal Reserve, the instrument is the functional equivalent of equity
or exposes the state member bank to essentially the same risks as an
equity instrument.
Attachment II_Summary of Definition of Qualifying Capital for Bank
Holding Companies*
[Using the Year-End 1992
Standard]
-
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - -
| Components |
Minimum
requirements |
|---|
| - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - |
| CORE CAPITAL (Tier 1) |
Must equal or exceed 4% of
weighted-risk assets. |
| Common stockholders' equity |
No
limit. |
Qualifying noncumulative perpetual preferred
stock.
|
No limit; bank holding companies should avoid undue
reliance on preferred stock in tier 1. |
Qualifying cumulative
perpetual preferred stock.
|
Limited to 25% of the sum of
common stock, qualifying perpetual stock, and minority
interests. |
Minority interest in equity accounts of
consolidated subsidiaries.
|
Organizations should avoid using
minority interests to introduce elements not other- wise qualifying
for tier 1 capital.
|
Less: Goodwill, other intangible assets,
credit-enhancing interest-only strips and nonfinancial equity
investments required to be deducted from
capital1
{{2-28-06 p.6120.02-B-3}} |
| SUPPLEMENTARY CAPITAL (Tier
2) |
Total of tier 2 is limited to 100% of tier
1.2 |
| Allowance for loan and lease losses |
Limited to 1.25%
of weighted-risk assets.2 |
| Perpetual preferred stock |
No
limit within tier 2. |
| Hybrid capital instruments and equity
contract notes. |
No limit within tier 2. |
| Subordinated debt
and intermediate-term preferred stock (original weighted
average maturity of 5 years or more). |
Subordinated debt and
intermediate-term preferred stock are limited to 50% of tier
12; amortized for capital purposes as they approach
maturity. |
| Revaluation reserves (equity and building). |
Not
included; organizations encouraged to disclose; may be evaluated on a
case-by-case basis for international comparisons; and taken into
account in making an overall assessment of capital. |
| DEDUCTIONS
(from sum of tier 1 and tier 2) |
Investments in
unconsolidated subsidiaries.
|
As a general rule, one-half of the
aggregate investments will be deducted from tier 1 capital and
one-half from tier 2 capital.3 |
| Reciprocal holdings of banking
organizations' capital securities |
Other deductions (such as
other subsidiaries or joint ventures) as determined by supervisory
authority.
|
On a case-by-case basis or as a matter of
policy after a formal rulemaking. |
TOTAL CAPITAL (tier 1 +
tier 2 -- deductions).
|
Must equal or exceed 8% of
weighted-risk assets. |
| - - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
-
| |
1 Requirements for the deduction of other intangible assets
and residual interests are set froth in section II.B.1. of this
appendix.
2 Amounts in excess of limitations are permitted but
do not qualify as capital.
3 A proportionately greater amount may be deducted
from tier 1 capital, if the risks associated with the subsidiary so
warrant.
* See discussion in section II of the guidelines for a
complete description of the requirements for, and the limitations on,
the components of qualifying capital.
III. Procedures for Computing Weighted Risk Assets
and Off-Balance Sheet Items
A. Procedures
Assets and credit equivalent amounts of off-balance sheet items of
bank holding companies are assigned to one of several broad risk
categories, according to the obligor, or, if relevant, the guarantor or
the nature of the collateral. The aggregate dollar value of the amount
in each category is then multiplied by the risk weight associated with
that category. The resulting weighted values from each of the risk
categories are added together, and this sum is the banking
organization's total weighted risk assets that comprise the denominator
of the risk-based capital ratio. Attachment I provides a sample
calculation.
Risk weights for all off-balance sheet items are determined by a
two-step process. First, the "credit equivalent amount" of
off-balance sheet items is determined, in most cases, by multiplying
the off-balance sheet item by a credit conversion factor. Second, the
credit equivalent amount is treated like any balance sheet asset and
generally is assigned to the
{{2-28-06 p.6120.02-B-4}}appropriate risk category according to
the obligor, or, if relevant, the guarantor or the nature of the
collateral.
In general, if a particular item qualifies for placement in more
than one risk category, it is assigned to the category that has the
lowest risk weight. A holding of a U.S. municipal revenue bond that is
fully guaranteed by a U.S. bank, for example, would be assigned the 20
percent risk weight appropriate to claims guaranteed by U.S. banks,
rather than the 50 percent risk weight appropriate to U.S. municipal
revenue bonds. 34
The terms "claims" and "securities" used in the context
of the discussion of risk weights, unless otherwise specified, refer to
loans or debt obligations of the entity on whom the claim is held.
Assets in the form of stock or equity holdings in commercial or
financial firms are assigned to the 100 percent risk category, unless
some other treatment is explicitly permitted.
The Federal Reserve will, on a case-by-case basis, determine the
appropriate risk weight for any asset or credit equivalent amount of an
off-balance sheet item that does not fit wholly within the terms of one
of the risk weight categories set forth below or that imposes risks on
a bank holding company that are incommensurate with the risk weight
otherwise specified below for the asset or off-balance sheet item. In
addition, the Federal Reserve will, on a case-by-case basis, determine
the appropriate credit conversion factor for any off-balance sheet item
that does not fit wholly within the terms of one of the credit
conversion factors set forth below or that imposes risks on a banking
organization that are incommensurate with the credit conversion factors
otherwise specified below for the off-balance sheet item. In making
such a determination, the Federal Reserve will consider the similarity
of the asset or off-balance sheet item to assets or off-balance sheet
items explicitly treated in the guidelines, as well as other relevant
factors.
B. Collateral, Guarantees, and Other Considerations
1. Collateral. The only forms of collateral that are
formally recognized by the riskbased capital framework are: cash
on deposit in a subsidiary lending institution; securities issued or
guaranteed by the central governments of the OECD-based group of
countries, 35
U.S. Government agencies, or U.S. Government-sponsored agencies; and
securities issued
{{4-28-06 p.6120.02-B-5}}by multilateral lending institutions or
regional development banks. Claims fully secured by such collateral
generally are assigned to the 20 percent risk-weight category.
Collateralized transactions meeting all the conditions described in
section III.C.1. may be assigned a zero percent risk weight.
With regard to collateralized claims that may be assigned to the 20
percent risk-weight category, the extent to which qualifying securities
are recognized as collateral is determined by their current market
value. If such a claim is only partially secured, that is, the market
value of the pledged securities is less than the face amount of a
balance-sheet asset or an off-balance-sheet item, the portion that is
covered by the market value of the qualifying collateral is assigned to
the 20 percent risk category, and the portion of the claim that is not
covered by collateral in the form of cash or a qualifying security is
assigned to the risk category appropriate to the obligor or, if
relevant, the guarantor.
2. Guarantees. Guarantees of the OECD and non-OECD
central governments, U.S. Government agencies, U.S.
Government-sponsored agencies, state and local governments of the
OECD-based group of countries, multilateral lending institutions and
regional development banks, U.S. depository institutions, and foreign
banks are also recognized. If a claim is partially guaranteed, that
is, coverage of the guarantee is less than the face amount of a balance
sheet asset or an off-balance sheet item, the portion that is not fully
covered by the guarantee is assigned to the risk category appropriate
to the obligor or, if relevant, to any collateral. The face amount of a
claim covered by two types of guarantees that have different risk
weights, such as a U.S. Government guarantee and a state
{{8-31-04 p.6120.02-C}}guarantee, is to be apportioned between
the two risk categories appropriate to the guarantors.
The existence of other forms of collateral or guarantees that the
risk-based capital framework does not formally recognize may be taken
into consideration in evaluating the risks inherent in an
organization's loan portfolio--which, in turn, would affect the overall
supervisory assessment of the organization's capital adequacy.
3. Recourse obligations, direct credit substitutes, residual
interests, and asset- and mortgage-backed securities. Direct
credit substitutes, assets transferred with recourse, and securities
issued in connection with asset securitizations and structured
financings are treated as described below. The term "asset
securitizations" or "securitizations" in this rule includes
structured financings, as well as asset securitization transactions.
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
{{8-31-04 p.6120.02-D}}
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.
{{2-28-06 p.6120.03}}
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
{{2-28-06 p.6120.04}}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.
b. Credit equivalent amounts and risk weight of recourse
obligations and direct credit substitutes. i. Credit
equivalent amount. Except as otherwise provided in sections
III.B.3.c. through f. and III.B.5. of this appendix, the
credit-equivalent amount for a recourse obligation or direct credit
substitute is the full amount of the credit-enhanced assets for which
the bank holding company directly or indirectly retains or assumes
credit risk multiplied by a 100 percent conversion factor.
ii. Risk-weight factor. To determine the bank holding
company's risk-weight factor for off-balance sheet recourse
obligations and direct credit substitutes, the credit equivalent amount
is assigned to the risk category appropriate to the obligor in the
underlying transaction, after considering any associated guarantees or
collateral. For a direct credit substitute that is an on-balance sheet
asset (e.g., a purchased subordinated security), a bank holding company
must calculate risk-weighted assets using the amount of the direct
credit substitute and the full amount of the assets it supports, i.e.,
all the more senior positions in the structure. The treatment of direct
credit substitutes that have been syndicated or in which risk
participations have been conveyed or acquired is set forth in section
III.D.1 of this appendix.
c. Externally-rated positions: credit-equivalent amounts and
risk weights of recourse obligations, direct credit substitutes,
residual interests, and asset- and mortgage-backed securities
(including asset-backed commercial paper)--i. Traded
positions. With respect to a recourse obligation, direct credit
substitute, residual interest (other than a credit-enhancing I/O strip)
or asset- and mortgage-backed security (including asset-backed
commercial paper) that is a traded position and that has received an
external rating on a long-term position that is one grade below
investment grade or better or a short-term rating that is investment
grade, the bank holding company may multiply the face amount of the
position by the appropriate risk weight, determined in accordance with
the tables below. Stripped mortgage-backed securities and other similar
instruments, such as interest-only or principal-only strips that are
not credit enhancements, must be assigned to the 100 percent risk
category. If a traded position has received more that one external
rating, the lowest single rating will apply.
{{10-31-03 p.6120.04-A}}
| Long-term
rating category |
Examples |
Risk weight(In
percent) |
|---|
| Highest or second highest investment grade |
AAA,
AA |
20 |
| Third highest investment
grade |
A |
50 |
| Lowest investment
grade |
BBB |
100 |
| One category below investment
grade |
BB |
200 |
| Short-term
rating |
Examples |
Risk weight(In
percent) |
| Highest investment grade |
A--1,
P--1 |
20 |
| Second highest investment grade |
A--2,
P--2 |
50 |
| Lowest investment grade |
A--3,
P--3 |
100
|
{{12-31-01 p.6120.05}}
ii. Non-traded positions. A recourse obligation, direct
credit substitute, or residual interest (but not a credit-enhancing I/O
strip) extended in connection with a securitization that is not a
traded position may be assigned a risk weight in accordance with
section III.B.3.c.i. of this appendix if:
1. It has been externally rated by more than one NRSRO;
2. It has received an external rating on a long-term
position that is one grade below investment grade or better or on a
short-term position that is investment grade by all NRSROs providing a
rating;
3. The ratings are publicly available; and
4. The ratings are based on the same criteria used to
rate traded positions.
If the ratings are different, the lowest rating will determine the
risk category to which the recourse obligation, direct credit
substitute, or residual interest will be assigned.
d. Senior positions not externally rated. For a recourse
obligation, direct credit substitute, residual interest, or asset- or
mortgage-backed security that is not externally rated but is senior or
preferred in all features to a traded position (including
collateralization and maturity), a bank holding company may apply a
risk weight to the face amount of the senior position in accordance
with section III.B.3.c.i. of this appendix, based on the traded
position, subject to any current or prospective supervisory guidance
and the bank holding company satisfying the Federal Reserve that this
treatment is appropriate. This section will apply only if the traded
subordinated position provides substantive credit support to the
unrated position until the unrated position matures.
e. Capital requirement for residual
interests--i. Capital requirement for credit-enhancing I/O
strips. After applying the concentration limit to credit-enhancing
I/O strips (both purchased and retained) in accordance with sections
II.B.2.c. through e. of this appendix, a bank holding company must
maintain risk-based capital for a credit-enhancing I/O strip (both
purchased and retained), regardless of the external rating on that
position, equal to the remaining amount of the credit-enhancing I/O
(net of any existing associated deferred tax liability), even if the
amount of risk-based capital required to be maintained exceeds the full
risk-based capital requirement for the assets transferred. Transactions
that, in substance, result in the retention of credit risk associated
with a transferred credit-enhancing I/O strip will be treated as if the
credit-enhancing I/O strip was retained by the bank holding company and
not transferred.
ii. Capital requirement for other interests. 1. If a
residual interest does not meet the requirements of sections III.B.3.c.
or d. of this appendix, a bank holding must maintain risk-based capital
equal to the remaining amount of the residual interest that is retained
on the balance sheet (net of any existing associated deferred tax
liability), even if the amount of risk-based capital required to be
maintained exceeds the full risk-based capital requirement for the
assets transferred. Transactions that, in substance, result in the
retention of credit risk associated with a transferred residual
interest will be treated as if the residual interest was retained by
the bank holding company and not transferred.
2. Where the aggregate capital requirement for residual
interests and other recourse obligations in connection with the same
transfer of assets exceed the full risk-based capital requirement for
those assets, a bank holding company must maintain risk-based capital
equal to the greater of the risk-based capital requirement for the
residual interest as calculated under section
III.B.3.e.ii.1. of this appendix or the full risk-based
capital requirement for the assets transferred.
f. Positions that are not rated by an NRSRO. A position
(but not a residual interest) maintained in connection with a
securitization and that is not rated by a NRSRO may be risk-weighted
based on the bank holding company's determination of the credit rating
of the position, as specified in the table below, multiplied by the
face amount of the position. In order to obtain this treatment, the
bank holding company's system for determining the credit rating of the
position must meet one of the three alternative standards set out in
sections III.B.3.f.i. through III.B.3.f.iii. of this
appendix.
| Rating
category |
Examples |
Risk weight(In
percent) |
|---|
| Highest or second highest investment
grade |
AAA, AA |
100 |
| Third highest
investment grade |
A |
100 |
| Lowest investment
grade |
BBB |
100 |
| One category below investment
grade |
BB |
200
|
{{12-31-01 p.6120.06}}
i. Internal risk rating used for asset-backed programs.
A direct credit substitute (other than a purchased
credit-enhancing I/O) is assumed in connection with an asset-backed
commercial paper program sponsored by the bank holding company and the
bank holding company is able to demonstrate to the satisfaction of the
Federal Reserve, prior to relying upon its use, that the bank holding
company's internal credit risk rating system is adequate. Adequate
internal credit risk rating systems usually contain the following
criteria:
1. The internal credit risk system is an integral part
of the bank holding company's risk management system, which explicitly
incorporates the full range of risks arising from a bank holding
company's participation in securitization activities;
2. Internal credit ratings are linked to measurable
outcomes, such as the probability that the position will experience any
loss, the position's expected loss given default, and the degree of
variance in losses given default on that position;
3. The bank holding company's internal credit risk
system must separately consider the risk associated with the underlying
loans or borrowers, and the risk associated with the structure of a
particular securitization transaction;
4. The bank holding company's internal credit risk
system must identify gradations of risk among "pass" assets and
other risk positions;
5. The bank holding company must have clear, explicit
criteria that are used to classify assets into each internal risk
grade, including subjective factors;
6. The bank holding company must have independent credit
risk management or loan review personnel assigning or reviewing the
credit risk ratings;
7. The bank holding company must have an internal audit
procedure that periodically verifies that the internal credit risk
ratings are assigned in accordance with the established criteria;
8. The bank holding company must monitor the performance
of the internal credit risk ratings assigned to nonrated, nontraded
direct credit substitutes over time to determine the appropriateness of
the initial credit risk rating assignment and adjust individual credit
risk ratings, or the overall internal credit risk ratings system, as
needed; and
9. The internal credit risk system must make credit risk
rating assumptions that are consistent with, or more conservative than,
the credit risk rating assumptions and methodologies of NRSROs.
ii. Program Ratings. A direct credit substitute or
recourse obligation (other than a residual interest) is assumed or
retained in connection with a structured finance program and a NRSRO
has reviewed the terms of the program and stated a rating for positions
associated with the program. If the program has options for different
combinations of assets, standards, internal credit enhancements and
other relevant factors, and the NRSRO specifies ranges of rating
categories to them, the bank holding company may apply the rating
category that corresponds to the bank holding company's position. In
order to rely on a program rating, the bank holding company must
demonstrate to the Federal Reserve's satisfaction that the credit risk
rating assigned to the program meets the same standards generally used
by NRSROs for rating traded positions. The bank holding company must
also demonstrate to the Federal Reserve's satisfaction that the
criteria underlying the NRSRO's assignment of ratings for the program
are satisfied for the particular position. If a bank holding company
participates in a securitization sponsored by another party, the
Federal Reserve may authorize the bank holding company to use this
approach based on a programmatic rating obtained by the sponsor of the
program.
iii. Computer Program. The bank holding company is using
an acceptable credit assessment computer program to determine the
rating of a direct credit substitute or recourse obligation (but not
residual interest) issued in connection with a structured finance
program. A NRSRO must have developed the computer program, and the bank
holding company must demonstrate to the Federal Reserve's satisfaction
that ratings under the program correspond credibly and reliably with
the rating of traded positions.
g. Limitations on risk-based capital
requirements--i. Low-level exposure. If the maximum
contractual exposure to loss retained or assumed by a bank holding
company in connection with a recourse obligation or a direct credit
substitute is less than the effective risk-based capital requirement
for the enhanced assets, the risk-based capital requirement is limited
to the maximum contractual exposure, less any liability account
established in accordance with generally accepted accounting
principles. This limitation does not apply
{{4-29-05 p.6120.07}}when a bank holding company provides
credit enhancement beyond any contractual obligation to support assets
it has sold.
ii. Mortgage-related securities or participation certificates
retained in a mortgage loan swap. If a bank holding company holds
a mortgage-related security or a participation certificate as a result
of a mortgage loan swap with recourse, capital is required to support
the recourse obligation plus the percentage of the mortgage-related
security or participation certificate that is not covered by the
recourse obligation. The total amount of capital required for the
on-balance sheet asset and the recourse obligation, however, is limited
to the capital requirement for the underlying loans, calculated as if
the organizatioin continued to hold these loans as on-balance sheet
assets.
iii. Related on-balance sheet assets. If a recourse
obligation or direct credit substitute subject to section III.B.3. of
this appendix also appears as a balance sheet asset, the balance sheet
asset is not included in an organization's risk-weighted assets to the
extent the value of the balance sheet asset is already included in the
off-balance sheet credit equivalent amount for the recourse obligation
or direct credit substitute, except in the case of loan servicing
assets and similar arrangements with embedded recourse obligations or
direct credit substitutes. In that case, both the on-balance sheet
assets and the related recourse obligations and direct credit
substitutes are incorporated into the risk-based capital calculation.
4. Maturity. Maturity is generally not a factor in
assigning items to risk categories with the exception of claims on
non-OECD banks, commitments, and interest rate and foreign exchange
rate contracts. Except for commitments, short-term is defined as one
year or less remaining maturity and long-term is defined as
over one year remaining maturity. In the case of
commitments, short-term is defined as one year or less original
maturity and long-term is defined as over one year original
maturity.
5. Small Business Loans and Leases on Personal Property
Transferred with Recourse.
a. Notwithstanding other provisions of this appendix A, a
qualifying banking organization that has transferred small business
loans and leases on personal property (small business obligations) with
recourse shall include in weighted-risk assets only the amount of
retained recourse, provided two conditions are met. First, the
transaction must be treated as a sale under GAAP and, second, the
banking organization must establish pursuant to GAAP a non-capital
reserve sufficient to meet the organization's reasonably estimated
li
|
