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6000 - FDIC Bank Holding Company Act
Appendix G to Part 225 – Capital Adequacy Guidelines for Bank
Holding Companies: Internal-Ratings-Based and Advanced Measurement
Approaches
Part I General Provisions
Section
1 Purpose, Applicability, Reservation of Authority, and Principle of
Conservatism
Section
2 Definitions
Section
3 Minimum Risk-Based Capital Requirements
Part II Qualifying Capital
Section
11 Additional Deductions
Section
12 Deductions and Limitations Not Required
Section
13 Eligible Credit Reserves
Part III Qualification
Section
21 Qualification Process
Section
22 Qualification Requirements
Section
23 Ongoing Qualification
Section
24 Merger and Acquisition Transitional Arrangements
Part IV Risk-Weighted Assets for General Credit Risk
Section
31 Mechanics for Calculating Total Wholesale and Retail Risk-Weighted
Assets
Section
32 Counterparty Credit Risk of Repo-Style Transactions, Eligible
Margin Loans, and OTC Derivative Contracts
Section
33 Guarantees and Credit Derivatives: PD Substitution and LGD
Adjustment Approaches
Section
34 Guarantees and Credit Derivatives: Double Default Treatment
Section
35 Risk-Based Capital Requirement for Unsettled Transactions
Part V Risk-Weighted Assets for Securitization Exposures
Section
41 Operational Criteria for Recognizing the Transfer of Risk
Section
42 Risk-Based Capital Requirement for Securitization Exposures
Section
43 Ratings-Based Approach (RBA)
Section
44 Internal Assessment Approach (IAA)
Section
45 Supervisory Formula Approach (SFA)
Section
46 Recognition of Credit Risk Mitigants for Securitization
Exposures
Section
47 Risk-Based Capital Requirement for Early Amortization Provisions
Part VI Risk-Weighted Assets for Equity Exposures
Section
51 Introduction and Exposure Measurement
Section
52 Simple Risk Weight Approach (SRWA)
Section
53 Internal Models Approach (IMA)
Section
54 Equity Exposures to Investment Funds
Section
55 Equity Derivative Contracts
Part VII Risk-Weighted Assets for Operational Risk
Section
61 Qualification Requirements for Incorporation of Operational Risk
Mitigants
Section
62 Mechanics of Risk-Weighted Asset Calculation
Part VIII Disclosure
Section
71 Disclosure Requirements
{{2-29-08 p.6120.43}}
Part I. General
Provisions
Section 1. Purpose, Applicability, Reservation of Authority, and
Principle of Conservatism
(a) Purpose. This appendix establishes:
(1) Minimum qualifying criteria for bank holding companies using
bank holding company-specific internal risk measurement and management
processes for calculating risk-based capital requirements;
(2) Methodologies for such bank holding companies to calculate
their risk-based capital requirements; and
(3) Public disclosure requirements for such bank holding
companies.
(b) Applicability. (1) (1) This appendix applies to a
bank holding company that:
(i) Is not a consolidated subsidiary of another bank holding
company that uses this appendix to calculate its risk-based capital
requirements; and
(ii) That:
(A) Is a U.S.-based bank holding company that has total
consolidated assets (excluding assets held by an insurance underwriting
subsidiary), as reported on the most recent year-end FR Y-9C Report,
equal to $250 billion or more;
(B) Has consolidated total on-balance sheet foreign exposure at
the most recent year-end equal to $10 billion or more (where total
on-balance sheet foreign exposure equals total cross-border claims less
claims with head office or guarantor located in another country plus
redistributed guaranteed amounts to the country of head office or
guarantor plus local country claims on local residents plus revaluation
gains on foreign exchange and derivative products, calculated in
accordance with the Federal Financial Institutions Examination Council
(FFIEC) 009 Country Exposure Report); or
(C) Has a subsidiary depository institution that is required, or
has elected, to use 12 CFR part 3, Appendix C, 12 CFR part 208,
Appendix F, 12 CFR part 325, Appendix F, or 12 CFR part 567, Appendix C
to calculate its risk-based capital requirements.
(2) Any bank holding company may elect to use this appendix to
calculate its risk-based capital requirements.
(3) A bank holding company that is subject to this appendix must
use this appendix unless the Federal Reserve determines in writing that
application of this appendix is not appropriate in light of the bank
holding company's asset size, level of complexity, risk profile, or
scope of operations. In making a determination under this paragraph,
the Federal Reserve will apply notice and response procedures in the
same manner and to the same extent as the notice and response
procedures in 12 CFR 263.202.
(c) Reservation of authority--(1) Additional
capital in the aggregate. The Federal Reserve may require a bank
holding company to hold an amount of capital greater than otherwise
required under this appendix if the Federal Reserve determines that the
bank holding company's risk-based capital requirement under this
appendix is not commensurate with the bank holding company's credit,
market, operational, or other risks. In making a determination under
this paragraph, the Federal Reserve will apply notice and response
procedures in the same manner and to the same extent as the notice and
response procedures in 12 CFR 263.202
(2) Specific risk-weighted asset amounts. (i) If the
Federal Reserve determines that the risk-weighted asset amount
calculated under this appendix by the bank holding company for one or
more exposures is not commensurate with the risks associated with those
exposures, the Federal Reserve may require the bank holding company to
assign a different risk-weighted asset amount to the exposures, to
assign different risk parameters to the exposures (if the exposures are
wholesale or retail exposures), or to use different model assumptions
for the exposures (if relevant), all as specified by the Federal
Reserve.
(ii) If the Federal Reserve determines that the risk-weighted
asset amount for operational risk produced by the bank holding company
under this appendix is not commensurate with the operational risks of
the bank holding company, the Federal Reserve may require the bank
holding company to assign a different risk-weighted asset amount for
operational risk, to change elements of its operational risk analytical
framework, including distributional and dependence assumptions, or to
make other changes to the bank holding company's operational risk
management processes, data and assessment systems, or quantification
systems, all as specified by the Federal Reserve.
{{2-29-08 p.6120.44}}
(3) Other supervisory authority. Nothing in this
appendix limits the authority of the Federal Reserve under any other
provision of law or regulation to take supervisory or enforcement
action, including action to address unsafe or unsound practices or
conditions, deficient capital levels, or violations of law.
(d) Principle of conservatism. Notwithstanding the
requirements of this appendix, a bank holding company may choose not to
apply a provision of this appendix to one or more exposures, provided
that:
(1) The bank holding company can demonstrate on an ongoing basis
to the satisfaction of the Federal Reserve that not applying the
provision would, in all circumstances, unambiguously generate a
risk-based capital requirement for each such exposure greater than that
which would otherwise be required under this appendix;
(2) The bank holding company appropriately manages the risk of
each such exposure;
(3) The bank holding company notifies the Federal Reserve in
writing prior to applying this principle to each such exposure; and
(4) The exposures to which the bank holding company applies this
principle are not, in the aggregate, material to the bank holding
company.
Section 2. Definitions
Advanced internal ratings-based (IRB) systems means a
bank holding company's internal risk rating and segmentation system;
risk parameter quantification system; data management and maintenance
system; and control, oversight, and validation system for credit risk
of wholesale and retail exposures.
Advanced systems means a bank holding company's advanced
IRB systems, operational risk management processes, operational risk
data and assessment systems, operational risk quantification systems,
and, to the extent the bank holding company uses the following systems,
the internal models methodology, double default excessive correlation
detection process, IMA for equity exposures, and IAA for securitization
exposures to ABCP programs.
Affiliate with respect to a company means any company
that controls, is controlled by, or is under common control with, the
company.
Applicable external rating means:
(1) With respect to an exposure that has multiple external
ratings assigned by NRSROs, the lowest solicited external rating
assigned to the exposure by any NRSRO; and
(2) With respect to an exposure that has a single external rating
assigned by an NRSRO, the external rating assigned to the exposure by
the NRSRO.
Applicable inferred rating means:
(1) With respect to an exposure that has multiple inferred
ratings, the lowest inferred rating based on a solicited external
rating; and
(2) With respect to an exposure that has a single inferred
rating, the inferred rating.
Asset-backed commercial paper (ABCP) program means a
program that primarily issues commercial paper that:
(1) Has an external rating; and
(2) Is backed by underlying exposures held in a bankruptcy-remote
SPE.
Asset-backed commercial paper (ABCP) program sponsor
means a bank holding company that:
(1) Establishes an ABCP program;
(2) Approves the sellers permitted to participate in an ABCP
program;
(3) Approves the exposures to be purchased by an ABCP program; or
(4) Administers the ABCP program by monitoring the underlying
exposures, underwriting or otherwise arranging for the placement of
debt or other obligations issued by the program, compiling monthly
reports, or ensuring compliance with the program documents and with the
program's credit and investment policy.
Backtesting means the comparison of a bank holding
company's internal estimates with actual outcomes during a sample
period not used in model development. In this context, backtesting is
one form of out-of-sample testing.
Bank holding company is defined in section 2 of the Bank
Holding Company Act (12 U.S.C. 1841).
{{12-31-07 p.6120.45}}
Benchmarking means the comparison of a bank holding
company's internal estimates with relevant internal and external data
or with estimates based on other estimation techniques.
Business environment and internal control factors means
the indicators of a bank holding company's operational risk profile
that reflect a current and forward-looking assessment of the bank
holding company's underlying business risk factors and internal control
environment.
Carrying value means, with respect to an asset, the value
of the asset on the balance sheet of the bank holding company,
determined in accordance with GAAP.
Clean-up call means a contractual provision that permits
an originating bank holding company or servicer to call securitization
exposures before their stated maturity or call date. See also
eligible clean-up call.
Commodity derivative contract means a commodity-linked
swap, purchased commodity-linked option, forward commodity-linked
contract, or any other instrument linked to commodities that gives rise
to similar counterparty credit risks.
Company means a corporation, partnership, limited
liability company, depository institution, business trust, special
purpose entity, association, or similar organization.
Control. A person or company controls a
company if it:
(1) Owns, controls, or holds with power to vote 25 percent or
more of a class of voting securities of the company; or
(2) Consolidates the company for financial reporting purposes.
Controlled early amortization provision means an early
amortization provision that meets all the following conditions:
(1) The originating bank holding company has appropriate policies
and procedures to ensure that it has sufficient capital and liquidity
available in the event of an early amortization;
(2) Throughout the duration of the securitization (including the
early amortization period), there is the same pro rata sharing of
interest, principal, expenses, losses, fees, recoveries, and other cash
flows from the underlying exposures based on the originating bank
holding company's and the investors' relative shares of the underlying
exposures outstanding measured on a consistent monthly basis;
(3) The amortization period is sufficient for at least 90 percent
of the total underlying exposures outstanding at the beginning of the
early amortization period to be repaid or recognized as in default; and
(4) The schedule for repayment of investor principal is not more
rapid than would be allowed by straight-line amortization over an
18-month period.
Credit derivative means a financial contract executed
under standard industry credit derivative documentation that allows one
party (the protection purchaser) to transfer the credit risk of one or
more exposures (reference exposure) to another party (the protection
provider). See also eligible credit derivative.
Credit-enhancing interest-only strip (CEIO) means an
on-balance sheet asset that, in form or in substance:
(1) Represents a contractual right to receive some or all of the
interest and no more than a minimal amount of principal due on the
underlying exposures of a securitization; and
(2) Exposes the holder to credit risk directly or indirectly
associated with the underlying exposures that exceeds a pro rata share
of the holder's claim on the underlying exposures, whether through
subordination provisions or other credit-enhancement techniques.
Credit-enhancing representations and warranties means
representations and warranties that are made or assumed in connection
with a transfer of underlying exposures (including loan servicing
assets) and that obligate a bank holding company to protect another
party from losses arising from the credit risk of the underlying
exposures. Credit-enhancing representations and warranties include
provisions to protect a party from losses resulting from the default or
nonperformance of the obligors of the underlying exposures or from an
insufficiency in the value of the collateral backing the underlying
exposures. Credit-enhancing representations and warranties do not
include:
(1) Early default clauses and similar warranties that permit the
return of, or premium refund clauses that cover, first-lien residential
mortgage exposures for a period not to exceed 120 days from the date of
transfer, provided that the date of transfer is within one year of
origination of the residential mortgage exposure;
{{12-31-07 p.6120.46}}
(2) Premium refund clauses that cover underlying exposures
guaranteed, in whole or in part, by the U.S. government, a U.S.
government agency, or a U.S. government sponsored enterprise, provided
that the clauses are for a period not to exceed 120 days from the date
of transfer; or
(3) Warranties that permit the return of underlying exposures in
instances of misrepresentation, fraud, or incomplete documentation.
Credit risk mitigant means collateral, a credit
derivative, or a guarantee.
Credit-risk-weighted assets means 1.06 multiplied by the
sum of:
(1) Total wholesale and retail risk-weighted assets;
(2) Risk-weighted assets for securitization exposures; and
(3) Risk-weighted assets for equity exposures.
Current exposure means, with respect to a netting set,
the larger of zero or the market value of a transaction or portfolio of
transactions within the netting set that would be lost upon default of
the counterparty, assuming no recovery on the value of the
transactions. Current exposure is also called replacement cost.
Default--(1) Retail. (i) A retail exposure of
a bank holding company is in default if:
(A) The exposure is 180 days past due, in the case of a
residential mortgage exposure or revolving exposure;
(B) The exposure is 120 days past due, in the case of all other
retail exposures; or
(C) The bank holding company has taken a full or partial
charge-off, write-down of principal, or material negative fair value
adjustment of principal on the exposure for credit-related reasons.
(ii) Notwithstanding paragraph (1)(i) of this definition, for a
retail exposure held by a non-U.S. subsidiary of the bank holding
company that is subject to an internal ratings-based approach to
capital adequacy consistent with the Basel Committee on Banking
Supervision's "International Convergence of Capital Measurement and
Capital Standards: A Revised Framework" in a non-U.S. jurisdiction,
the bank holding company may elect to use the definition of default
that is used in that jurisdiction, provided that the bank holding
company has obtained prior approval from the Federal Reserve to use the
definition of default in that jurisdiction.
(iii) A retail exposure in default remains in default until the
bank holding company has reasonable assurance of repayment and
performance for all contractual principal and interest payments on the
exposure.
(2) Wholesale. (i) A bank holding company's wholesale
obligor is in default if:
(A) The bank holding company determines that the obligor is
unlikely to pay its credit obligations to the bank holding company in
full, without recourse by the bank holding company to actions such as
realizing collateral (if held); or
(B) The obligor is past due more than 90 days on any material
credit obligation(s) to the bank holding
company. 1
(ii) An obligor in default remains in default until the bank
holding company has reasonable assurance of repayment and performance
for all contractual principal and interest payments on all exposures of
the bank holding company to the obligor (other than exposures that have
been fully written-down or charged-off).
Dependence means a measure of the association among
operational losses across and within units of measure.
Depository institution is defined in section 3 of the
Federal Deposit Insurance Act (12 U.S.C. 1813).
Derivative contract means a financial contract whose
value is derived from the values of one or more underlying assets,
reference rates, or indices of asset values or reference rates.
Derivative contracts include interest rate derivative contracts,
exchange rate derivative contracts, equity derivative contracts,
commodity derivative contracts, credit derivatives, and any other
instrument that poses similar counterparty credit risks. Derivative
contracts also include unsettled securities, commodities, and foreign
exchange transactions with a contractual settlement or delivery lag
that is longer than the lesser of the market standard for the
particular instrument or five business days.
{{12-31-07 p.6120.47}}
Early amortization provision means a provision in the
documentation governing a securitization that, when triggered, causes
investors in the securitization exposures to be repaid before the
original stated maturity of the securitization exposures, unless the
provision:
(1) Is triggered solely by events not directly related to the
performance of the underlying exposures or the originating bank holding
company (such as material changes in tax laws or regulations); or
(2) Leaves investors fully exposed to future draws by obligors on
the underlying exposures even after the provision is triggered.
Economic downturn conditions means, with respect to an
exposure held by the bank holding company, those conditions in which
the aggregate default rates for that exposure's wholesale or retail
exposure subcategory (or subdivision of such subcategory selected by
the bank holding company) in the exposure's national jurisdiction (or
subdivision of such jurisdiction selected by the bank holding company)
are significantly higher than average.
Effective maturity (M) of a wholesale exposure means:
(1) For wholesale exposures other than repo-style transactions,
eligible margin loans, and OTC derivative contracts described in
paragraph (2) or (3) of this definition:
(i) The weighted-average remaining maturity (measured in years,
whole or fractional) of the expected contractual cash flows from the
exposure, using the undiscounted amounts of the cash flows as weights;
or
(ii) The nominal remaining maturity (measured in years, whole or
fractional) of the exposure.
(2) For repo-style transactions, eligible margin loans, and OTC
derivative contracts subject to a qualifying master netting agreement
for which the bank holding company does not apply the internal models
approach in paragraph (d) of section 32 of this appendix, the
weighted-average remaining maturity (measured in years, whole or
fractional) of the individual transactions subject to the qualifying
master netting agreement, with the weight of each individual
transaction set equal to the notional amount of the transaction.
(3) For repo-style transactions, eligible margin loans, and OTC
derivative contracts for which the bank holding company applies the
internal models approach in paragraph (d) of section 32 of this
appendix, the value determined in paragraph (d)(4) of section 32 of
this appendix.
Effective notional amount means, for an eligible
guarantee or eligible credit derivative, the lesser of the contractual
notional amount of the credit risk mitigant and the EAD of the hedged
exposure, multiplied by the percentage coverage of the credit risk
mitigant. For example, the effective notional amount of an eligible
guarantee that covers, on a pro rata basis, 40 percent of any losses on
a $100 bond would be $40.
Eligible clean-up call means a clean-up call that:
(1) Is exercisable solely at the discretion of the originating
bank holding company or servicer;
(2) Is not structured to avoid allocating losses to
securitization exposures held by investors or otherwise structured to
provide credit enhancement to the securitization; and
(3) (i) For a traditional securitization, is only exercisable
when 10 percent or less of the principal amount of the underlying
exposures or securitization exposures (determined as of the inception
of the securitization) is outstanding; or
(ii) For a synthetic securitization, is only exercisable when 10
percent or less of the principal amount of the reference portfolio of
underlying exposures (determined as of the inception of the
securitization) is outstanding.
Eligible credit derivative means a credit derivative in
the form of a credit default swap, nth-to-default swap, total
return swap, or any other form of credit derivative approved by the
Federal Reserve, provided that:
(1) The contract meets the requirements of an eligible guarantee
and has been confirmed by the protection purchaser and the protection
provider;
(2) Any assignment of the contract has been confirmed by all
relevant parties;
(3) If the credit derivative is a credit default swap or
nth-to-default swap, the contract includes the following credit
events:
(i) Failure to pay any amount due under the terms of the
reference exposure, subject to any applicable minimal payment threshold
that is consistent with standard market
{{12-31-07 p.6120.48}}practice and with a grace period that
is closely in line with the grace period of the reference exposure; and
(ii) Bankruptcy, insolvency, or inability of the obligor on the
reference exposure to pay its debts, or its failure or admission in
writing of its inability generally to pay its debts as they become due,
and similar events;
(4) The terms and conditions dictating the manner in which the
contract is to be settled are incorporated into the contract;
(5) If the contract allows for cash settlement, the contract
incorporates a robust valuation process to estimate loss reliably and
specifies a reasonable period for obtaining post-credit event
valuations of the reference exposure;
(6) If the contract requires the protection purchaser to transfer
an exposure to the protection provider at settlement, the terms of at
least one of the exposures that is permitted to be transferred under
the contract provides that any required consent to transfer may not be
unreasonably withheld;
(7) If the credit derivative is a credit default swap or
nth-to-default swap, the contract clearly identifies the parties
responsible for determining whether a credit event has occurred,
specifies that this determination is not the sole responsibility of the
protection provider, and gives the protection purchaser the right to
notify the protection provider of the occurrence of a credit event; and
(8) If the credit derivative is a total return swap and the bank
holding company records net payments received on the swap as net
income, the bank holding company records offsetting deterioration in
the value of the hedged exposure (either through reductions in fair
value or by an addition to reserves).
Eligible credit reserves means all general allowances
that have been established through a charge against earnings to absorb
credit losses associated with on- or off-balance sheet wholesale and
retail exposures, including the allowance for loan and lease losses
(ALLL) associated with such exposures but excluding allocated transfer
risk reserves established pursuant to 12 U.S.C. 3904 and other specific
reserves created against recognized losses.
Eligible double default guarantor, with respect to a
guarantee or credit derivative obtained by a bank holding company,
means:
(1) U.S.-based entities. A depository institution, a
bank holding company, a savings and loan holding company (as defined in
12 U.S.C. 1467a) provided all or substantially all of the holding
company's activities are permissible for a financial holding company
under 12 U.S.C. 1843(k), a securities broker or dealer registered with
the SEC under the Securities Exchange Act of 1934 (15 U.S.C. 78o
et seq.), or an insurance company in the business of
providing credit protection (such as a monoline bond insurer or
re-insurer) that is subject to supervision by a State insurance
regulator, if:
(i) At the time the guarantor issued the guarantee or credit
derivative or at any time thereafter, the bank holding company assigned
a PD to the guarantor's rating grade that was equal to or lower than
the PD associated with a long-term external rating in the third-highest
investment-grade rating category; and
(ii) The bank holding company currently assigns a PD to the
guarantor's rating grade that is equal to or lower than the PD
associated with a long-term external rating in the lowest
investment-grade rating category; or
(2) Non-U.S.-based entities. A foreign bank (as
defined in § 211.2 of the Federal Reserve Board's Regulation K (12
CFR 211.2)), a non-U.S.-based securities firm, or a non-U.S.-based
insurance company in the business of providing credit protection, if:
(i) The bank holding company demonstrates that the guarantor is
subject to consolidated supervision and regulation comparable to that
imposed on U.S. depository institutions, securities broker-dealers, or
insurance companies (as the case may be), or has issued and outstanding
an unsecured long-term debt security without credit enhancement that
has a long-term applicable external rating of at least investment
grade;
(ii) At the time the guarantor issued the guarantee or credit
derivative or at any time thereafter, the bank holding company assigned
a PD to the guarantor's rating grade that was equal to or lower than
the PD associated with a long-term external rating in the third-highest
investment-grade rating category; and
(iii) The bank holding company currently assigns a PD to the
guarantor's rating grade that is equal to or lower than the PD
associated with a long-term external rating in the lowest
investment-grade rating category.
{{12-31-07 p.6120.49}}
Eligible guarantee means a guarantee that:
(1) Is written and unconditional;
(2) Covers all or a pro rata portion of all contractual payments
of the obligor on the reference exposure;
(3) Gives the beneficiary a direct claim against the protection
provider;
(4) Is not unilaterally cancelable by the protection provider for
reasons other than the breach of the contract by the beneficiary;
(5) Is legally enforceable against the protection provider in a
jurisdiction where the protection provider has sufficient assets
against which a judgment may be attached and enforced;
(6) Requires the protection provider to make payment to the
beneficiary on the occurrence of a default (as defined in the
guarantee) of the obligor on the reference exposure in a timely manner
without the beneficiary first having to take legal actions to pursue
the obligor for payment;
(7) Does not increase the beneficiary's cost of credit protection
on the guarantee in response to deterioration in the credit quality of
the reference exposure; and
(8) Is not provided by an affiliate of the bank holding company,
unless the affiliate is an insured depository institution, bank,
securities broker or dealer, or insurance company that:
(i) Does not control the bank holding company; and
(ii) Is subject to consolidated supervision and regulation
comparable to that imposed on U.S. depository institutions, securities
broker-dealers, or insurance companies (as the case may be).
Eligible margin loan means an extension of credit where:
(1) The extension of credit is collateralized exclusively by
liquid and readily marketable debt or equity securities, gold, or
conforming residential mortgages;
(2) The collateral is marked to market daily, and the transaction
is subject to daily margin maintenance requirements;
(3) The extension of credit is conducted under an agreement that
provides the bank holding company the right to accelerate and terminate
the extension of credit and to liquidate or set off collateral promptly
upon an event of default (including upon an event of bankruptcy,
insolvency, or similar proceeding) of the counterparty, provided that,
in any such case, any exercise of rights under the agreement will not
be stayed or avoided under applicable law in the relevant
jurisdictions; 2
and
(4) The bank holding company has conducted sufficient legal
review to conclude with a well-founded basis (and maintains sufficient
written documentation of that legal review) that the agreement meets
the requirements of paragraph (3) of this definition and is legal,
valid, binding, and enforceable under applicable law in the relevant
jurisdictions.
Eligible operational risk offsets means amounts, not to
exceed expected operational loss, that:
(1) Are generated by internal business practices to absorb highly
predictable and reasonably stable operational losses, including
reserves calculated consistent with GAAP; and
(2) Are available to cover expected operational losses with a
high degree of certainty over a one-year horizon.
Eligible purchased wholesale exposure means a purchased
wholesale exposure that:
(1) The bank holding company or securitization SPE purchased from
an unaffiliated seller and did not directly or indirectly originate;
(2) Was generated on an arm's-length basis between the seller and
the obligor (intercompany accounts receivable and receivables subject
to contra-accounts between firms that buy and sell to each other do not
satisfy this criterion);
(3) Provides the bank holding company or securitization SPE with
a claim on all proceeds from the exposure or a pro rata interest in the
proceeds from the exposure;
{{12-31-07 p.6120.50}}
(4) Has an M of less than one year; and
(5) When consolidated by obligor, does not represent a
concentrated exposure relative to the portfolio of purchased wholesale
exposures.
Eligible securitization guarantor means:
(1) A sovereign entity, the Bank for International Settlements,
the International Monetary Fund, the European Central Bank, the
European Commission, a Federal Home Loan Bank, Federal Agricultural
Mortgage Corporation (Farmer Mac), a multilateral development bank, a
depository institution, a bank holding company, a savings and loan
holding company (as defined in 12 U.S.C. 1467a) provided all or
substantially all of the holding company's activities are permissible
for a financial holding company under 12 U.S.C. 1843(k), a foreign bank
(as defined in § 211.2 of the Federal Reserve Board's Regulation K
(12 CFR 211.2)), or a securities firm;
(2) Any other entity (other than a securitization SPE) that has
issued and outstanding an unsecured long-term debt security without
credit enhancement that has a long-term applicable external rating in
one of the three highest investment-grade rating categories; or
(3) Any other entity (other than a securitization SPE) that has a
PD assigned by the bank holding company that is lower than or equal to
the PD associated with a long-term external rating in the third highest
investment-grade rating category.
Eligible servicer cash advance facility means a servicer
cash advance facility in which:
(1) The servicer is entitled to full reimbursement of advances,
except that a servicer may be obligated to make non-reimbursable
advances for a particular underlying exposure if any such advance is
contractually limited to an insignificant amount of the outstanding
principal balance of that exposure;
(2) The servicer's right to reimbursement is senior in right of
payment to all other claims on the cash flows from the underlying
exposures of the securitization; and
(3) The servicer has no legal obligation to, and does not, make
advances to the securitization if the servicer concludes the advances
are unlikely to be repaid.
Equity derivative contract means an equity-linked swap,
purchased equity-linked option, forward equity-linked contract, or any
other instrument linked to equities that gives rise to similar
counterparty credit risks.
Equity exposure means:
(1) A security or instrument (whether voting or non-voting) that
represents a direct or indirect ownership interest in, and is a
residual claim on, the assets and income of a company, unless:
(i) The issuing company is consolidated with the bank holding
company under GAAP;
(ii) The bank holding company is required to deduct the ownership
interest from tier 1 or tier 2 capital under this appendix;
(iii) The ownership interest incorporates a payment or other
similar obligation on the part of the issuing company (such as an
obligation to make periodic payments); or
(iv) The ownership interest is a securitization exposure;
(2) A security or instrument that is mandatorily convertible into
a security or instrument described in paragraph (1) of this definition;
(3) An option or warrant that is exercisable for a security or
instrument described in paragraph (1) of this definition; or
(4) Any other security or instrument (other than a securitization
exposure) to the extent the return on the security or instrument is
based on the performance of a security or instrument described in
paragraph (1) of this definition.
Excess spread for a period means:
(1) Gross finance charge collections and other income received by
a securitization SPE (including market interchange fees) over a period
minus interest paid to the holders of the securitization exposures,
servicing fees, charge-offs, and other senior trust or similar expenses
of the SPE over the period; divided by
(2) The principal balance of the underlying exposures at the end
of the period.
Exchange rate derivative contract means a cross-currency
interest rate swap, forward foreign-exchange contract, currency option
purchased, or any other instrument linked to exchange rates that gives
rise to similar counterparty credit risks.
Excluded mortgage exposure means any one- to four-family
residential pre-sold construction loan for a residence for which the
purchase contract is cancelled that would receive a
{{12-31-07 p.6120.51}}100 percent risk weight under section
618(a)(2) of the Resolution Trust Corporation Refinancing,
Restructuring, and Improvement Act and under 12 CFR part 225, Appendix
A, section III.C.3.
Expected credit loss (ECL) means:
(1) For a wholesale exposure to a non-defaulted obligor or
segment of non-defaulted retail exposures that is carried at fair value
with gains and losses flowing through earnings or that is classified as
held-for-sale and is carried at the lower of cost or fair value with
losses flowing through earnings, zero.
(2) For all other wholesale exposures to non-defaulted obligors
or segments of non-defaulted retail exposures, the product of PD times
LGD times EAD for the exposure or segment.
(3) For a wholesale exposure to a defaulted obligor or segment of
defaulted retail exposures, the bank holding company's impairment
estimate for allowance purposes for the exposure or segment.
(4) Total ECL is the sum of expected credit losses for all
wholesale and retail exposures other than exposures for which the bank
holding company has applied the double default treatment in section 34
of this appendix.
Expected exposure (EE) means the expected value of the
probability distribution of non-negative credit risk exposures to a
counterparty at any specified future date before the maturity date of
the longest term transaction in the netting set. Any negative market
values in the probability distribution of market values to a
counterparty at a specified future date are set to zero to convert the
probability distribution of market values to the probability
distribution of credit risk exposures.
Expected operational loss (EOL) means the expected value
of the distribution of potential aggregate operational losses, as
generated by the bank holding company's operational risk quantification
system using a one-year horizon.
Expected positive exposure (EPE) means the weighted
average over time of expected (non-negative) exposures to a
counterparty where the weights are the proportion of the time interval
that an individual expected exposure represents. When calculating
risk-based capital requirements, the average is taken over a one-year
horizon.
Exposure at default (EAD). (1) For the on-balance sheet
component of a wholesale exposure or segment of retail exposures (other
than an OTC derivative contract, or a repo-style transaction or
eligible margin loan for which the bank holding company determines EAD
under section 32 of this appendix), EAD means:
(i) If the exposure or segment is a security classified as
available-for-sale, the bank holding company's carrying value
(including net accrued but unpaid interest and fees) for the exposure
or segment less any allocated transfer risk reserve for the exposure or
segment, less any unrealized gains on the exposure or segment, and plus
any unrealized losses on the exposure or segment; or
(ii) If the exposure or segment is not a security classified as
available-for-sale, the bank holding company's carrying value
(including net accrued but unpaid interest and fees) for the exposure
or segment less any allocated transfer risk reserve for the exposure or
segment.
(2) For the off-balance sheet component of a wholesale exposure
or segment of retail exposures (other than an OTC derivative contract,
or a repo-style transaction or eligible margin loan for which the bank
holding company determines EAD under section 32 of this appendix) in
the form of a loan commitment, line of credit, trade-related letter of
credit, or transaction-related contingency, EAD means the bank holding
company's best estimate of net additions to the outstanding amount owed
the bank holding company, including estimated future additional draws
of principal and accrued but unpaid interest and fees, that are likely
to occur over a one-year horizon assuming the wholesale exposure or the
retail exposures in the segment were to go into default. This estimate
of net additions must reflect what would be expected during economic
downturn conditions. Trade-related letters of credit are short-term,
self-liquidating instruments that are used to finance the movement of
goods and are collateralized by the underlying goods.
Transaction-related contingencies relate to a particular transaction
and include, among other things, performance bonds and
performance-based letters of credit.
(3) For the off-balance sheet component of a wholesale exposure
or segment of retail exposures (other than an OTC derivative contract,
or a repo-style transaction or eligible
{{12-31-07 p.6120.52}}margin loan for which the bank holding
company determines EAD under section 32 of this appendix) in the form
of anything other than a loan commitment, line of credit, trade-related
letter of credit, or transaction-related contingency, EAD means the
notional amount of the exposure or segment.
(4) EAD for OTC derivative contracts is calculated as described
in section 32 of this appendix. A bank holding company also may
determine EAD for repo-style transactions and eligible margin loans as
described in section 32 of this appendix.
(5) For wholesale or retail exposures in which only the drawn
balance has been securitized, the bank holding company must reflect its
share of the exposures' undrawn balances in EAD. Undrawn balances of
revolving exposures for which the drawn balances have been securitized
must be allocated between the seller's and investors' interests on a
pro rata basis, based on the proportions of the seller's and investors'
shares of the securitized drawn balances.
Exposure category means any of the wholesale, retail,
securitization, or equity exposure categories.
External operational loss event data means, with respect
to a bank holding company, gross operational loss amounts, dates,
recoveries, and relevant causal information for operational loss events
occurring at organizations other than the bank holding company.
External rating means a credit rating that is assigned by
an NRSRO to an exposure, provided:
(1) The credit rating fully reflects the entire amount of credit
risk with regard to all payments owed to the holder of the exposure. If
a holder is owed principal and interest on an exposure, the credit
rating must fully reflect the credit risk associated with timely
repayment of principal and interest. If a holder is owed only principal
on an exposure, the credit rating must fully reflect only the credit
risk associated with timely repayment of principal; and
(2) The credit rating is published in an accessible form and is
or will be included in the transition matrices made publicly available
by the NRSRO that summarize the historical performance of positions
rated by the NRSRO.
Financial collateral means collateral:
(1) In the form of:
(i) Cash on deposit with the bank holding company (including cash
held for the bank holding company by a third-party custodian or
trustee);
(ii) Gold bullion;
(iii) Long-term debt securities that have an applicable external
rating of one category below investment grade or higher;
(iv) Short-term debt instruments that have an applicable external
rating of at least investment grade;
(v) Equity securities that are publicly traded;
(vi) Convertible bonds that are publicly traded;
(vii) Money market mutual fund shares and other mutual fund
shares if a price for the shares is publicly quoted daily; or
(viii) Conforming residential mortgages; and
(2) In which the bank holding company has a perfected, first
priority security interest or, outside of the United States, the legal
equivalent thereof (with the exception of cash on deposit and
notwithstanding the prior security interest of any custodial agent).
GAAP means generally accepted accounting principles as
used in the United States.
Gain-on-sale means an increase in the equity capital (as
reported on Schedule HC of the FR Y-9C Report) of a bank holding
company that results from a securitization (other than an increase in
equity capital that results from the bank holding company's receipt of
cash in connection with the securitization).
Guarantee means a financial guarantee, letter of credit,
insurance, or other similar financial instrument (other than a credit
derivative) that allows one party (beneficiary) to transfer the credit
risk of one or more specific exposures (reference exposure) to another
party (protection provider). See also eligible guarantee.
High volatility commercial real estate (HVCRE) exposure
means a credit facility that finances or has financed the
acquisition, development, or construction (ADC) of real property,
unless the facility finances:
(1) One- to four-family residential properties; or
{{12-31-07 p.6120.53}}
(2) Commercial real estate projects in which:
(i) The loan-to-value ratio is less than or equal to the
applicable maximum supervisory loan-to-value ratio in the relevant
agency's real estate lending standards at 12 CFR part 34, Subpart D
(OCC), 12 CFR part 208, Appendix C (Federal Reserve); 12 CFR part 365,
Subpart D (FDIC); and 12 CFR 560.100-560.101 (OTS).
(ii) The borrower has contributed capital to the project in the
form of cash or unencumbered readily marketable assets (or has paid
development expenses out-of-pocket) of at least 15 percent of the real
estate's appraised "as completed" value; and
(iii) The borrower contributed the amount of capital required by
paragraph (2)(ii) of this definition before the bank holding company
advances funds under the credit facility, and the capital contributed
by the borrower, or internally generated by the project, is
contractually required to remain in the project throughout the life of
the project. The life of a project concludes only when the credit
facility is converted to permanent financing or is sold or paid in
full. Permanent financing may be provided by the bank holding company
that provided the ADC facility as long as the permanent financing is
subject to the bank holding company's underwriting criteria for
long-term mortgage loans.
Inferred rating. A securitization exposure has an
inferred rating equal to the external rating referenced in
paragraph (2)(i) of this definition if:
(1) The securitization exposure does not have an external rating;
and
(2) Another securitization exposure issued by the same issuer and
secured by the same underlying exposures:
(i) Has an external rating;
(ii) Is subordinated in all respects to the unrated
securitization exposure;
(iii) Does not benefit from any credit enhancement that is not
available to the unrated securitization exposure; and
(iv) Has an effective remaining maturity that is equal to or
longer than that of the unrated securitization exposure.
Interest rate derivative contract means a single-currency
interest rate swap, basis swap, forward rate agreement, purchased
interest rate option, when-issued securities, or any other instrument
linked to interest rates that gives rise to similar counterparty credit
risks.
Internal operational loss event data means, with respect
to a bank holding company, gross operational loss amounts, dates,
recoveries, and relevant causal information for operational loss events
occurring at the bank holding company.
Investing bank holding company means, with respect to a
securitization, a bank holding company that assumes the credit risk of
a securitization exposure (other than an originating bank holding
company of the securitization). In the typical synthetic
securitization, the investing bank holding company sells credit
protection on a pool of underlying exposures to the originating bank
holding company.
Investment fund means a company:
(1) All or substantially all of the assets of which are financial
assets; and
(2) That has no material liabilities.
Investors' interest EAD means, with respect to a
securitization, the EAD of the underlying exposures multiplied by the
ratio of:
(1) The total amount of securitization exposures issued by the
securitization SPE to investors; divided by
(2) The outstanding principal amount of underlying exposures.
Loss given default (LGD) means:
(1) For a wholesale exposure, the greatest of:
(i) Zero;
(ii) The bank holding company's empirically based best estimate
of the long-run default-weighted average economic loss, per dollar of
EAD, the bank holding company would expect to incur if the obligor (or
a typical obligor in the loss severity grade assigned by the bank
holding company to the exposure) were to default within a one-year
horizon over a mix of economic conditions, including economic downturn
conditions; or
(iii) The bank holding company's empirically based best estimate
of the economic loss, per dollar of EAD, the bank holding company would
expect to incur if the obligor (or a typical obligor in the loss
severity grade assigned by the bank holding company to the exposure)
were to default within a one-year horizon during economic downturn
conditions.
(2) For a segment of retail exposures, the greatest
of:
{{12-31-07 p.6120.54}}
(i) Zero;
(ii) The bank holding company's empirically based best estimate
of the long-run default-weighted average economic loss, per dollar of
EAD, the bank holding company would expect to incur if the exposures in
the segment were to default within a one-year horizon over a mix of
economic conditions, including economic downturn conditions; or
(iii) The bank holding company's empirically based best estimate
of the economic loss, per dollar of EAD, the bank holding company would
expect to incur if the exposures in the segment were to default within
a one-year horizon during economic downturn conditions.
(3) The economic loss on an exposure in the event of default is
all material credit-related losses on the exposure (including accrued
but unpaid interest or fees, losses on the sale of collateral, direct
workout costs, and an appropriate allocation of indirect workout
costs). Where positive or negative cash flows on a wholesale exposure
to a defaulted obligor or a defaulted retail exposure (including
proceeds from the sale of collateral, workout costs, additional
extensions of credit to facilitate repayment of the exposure, and
draw-downs of unused credit lines) occur after the date of default, the
economic loss must reflect the net present value of cash flows as of
the default date using a discount rate appropriate to the risk of the
defaulted exposure.
Main index means the Standard & Poor's 500 Index, the
FTSE All-World Index, and any other index for which the bank holding
company can demonstrate to the satisfaction of the Federal Reserve that
the equities represented in the index have comparable liquidity, depth
of market, and size of bid-ask spreads as equities in the Standard &
Poor's 500 Index and FTSE All-World Index.
Multilateral development bank means the International
Bank for Reconstruction and Development, the International Finance
Corporation, the Inter-American Development Bank, the Asian Development
Bank, the African Development Bank, the European Bank for
Reconstruction and Development, the European Investment Bank, the
European Investment Fund, the Nordic Investment Bank, the Caribbean
Development Bank, the Islamic Development Bank, the Council of Europe
Development Bank, and any other multilateral lending institution or
regional development bank in which the U.S. government is a shareholder
or contributing member or which the Federal Reserve determines poses
comparable credit risk.
Nationally recognized statistical rating organization (NRSRO)
means an entity registered with the SEC as a nationally recognized
statistical rating organization under section 15E of the Securities
Exchange Act of 1934 (15 U.S.C. 78o-7).
Netting set means a group of transactions with a single
counterparty that are subject to a qualifying master netting agreement
or qualifying cross-product master netting agreement. For purposes of
the internal models methodology in paragraph (d) of section 32 of this
appendix, each transaction that is not subject to such a master netting
agreement is its own netting set.
Nth-to-default credit derivative means a credit
derivative that provides credit protection only for the
nth-defaulting reference exposure in a group of reference
exposures.
Obligor means the legal entity or natural person
contractually obligated on a wholesale exposure, except that a bank
holding company may treat the following exposures as having separate
obligors:
(1) Exposures to the same legal entity or natural person
denominated in different currencies;
(2) (i) An income-producing real estate exposure for which all or
substantially all of the repayment of the exposure is reliant on the
cash flows of the real estate serving as collateral for the exposure;
the bank holding company, in economic substance, does not have recourse
to the borrower beyond the real estate collateral; and no cross-default
or cross-acceleration clauses are in place other than clauses obtained
solely out of an abundance of caution; and
(ii) Other credit exposures to the same legal entity or natural
person; and
(3) (i) A wholesale exposure authorized under section 364 of the
U.S. Bankruptcy Code (11 U.S.C. 364) to a legal entity or natural
person who is a debtor-in-possession for purposes of Chapter 11 of the
Bankruptcy Code; and
(ii) Other credit exposures to the same legal entity or natural
person.
Operational loss means a loss (excluding insurance or tax
effects) resulting from an operational loss event. Operational loss
includes all expenses associated with an operational
{{12-31-07 p.6120.55}}loss event except for opportunity
costs, forgone revenue, and costs related to risk management and
control enhancements implemented to prevent future operational losses.
Operational loss event means an event that results in
loss and is associated with any of the following seven operational loss
event type categories:
(1) Internal fraud, which means the operational loss event type
category that comprises operational losses resulting from an act
involving at least one internal party of a type intended to defraud,
misappropriate property, or circumvent regulations, the law, or company
policy, excluding diversity- and discrimination-type events.
(2) External fraud, which means the operational loss event type
category that comprises operational losses resulting from an act by a
third party of a type intended to defraud, misappropriate property, or
circumvent the law. Retail credit card losses arising from
non-contractual, third-party initiated fraud (for example, identity
theft) are external fraud operational losses. All other third-party
initiated credit losses are to be treated as credit risk losses.
(3) Employment practices and workplace safety, which means the
operational loss event type category that comprises operational losses
resulting from an act inconsistent with employment, health, or safety
laws or agreements, payment of personal injury claims, or payment
arising from diversity- and discrimination-type events.
(4) Clients, products, and business practices, which means the
operational loss event type category that comprises operational losses
resulting from the nature or design of a product or from an
unintentional or negligent failure to meet a professional obligation to
specific clients (including fiduciary and suitability requirements).
(5) Damage to physical assets, which means the operational loss
event type category that comprises operational losses resulting from
the loss of or damage to physical assets from natural disaster or other
events.
(6) Business disruption and system failures, which means the
operational loss event type category that comprises operational losses
resulting from disruption of business or system failures.
(7) Execution, delivery, and process management, which means the
operational loss event type category that comprises operational losses
resulting from failed transaction processing or process management or
losses arising from relations with trade counterparties and vendors.
Operational risk means the risk of loss resulting from
inadequate or failed internal processes, people, and systems or from
external events (including legal risk but excluding strategic and
reputational risk).
Operational risk exposure means the 99.9th percentile
of the distribution of potential aggregate operational losses, as
generated by the bank holding company's operational risk quantification
system over a one-year horizon (and not incorporating eligible
operational risk offsets or qualifying operational risk mitigants).
Originating bank holding company, with respect to a
securitization, means a bank holding company that:
(1) Directly or indirectly originated or securitized the
underlying exposures included in the securitization; or
(2) Serves as an ABCP program sponsor to the securitization.
Other retail exposure means an exposure (other than a
securitization exposure, an equity exposure, a residential mortgage
exposure, an excluded mortgage exposure, a qualifying revolving
exposure, or the residual value portion of a lease exposure) that is
managed as part of a segment of exposures with homogeneous risk
characteristics, not on an individual-exposure basis, and is either:
(1) An exposure to an individual for non-business purposes; or
(2) An exposure to an individual or company for business purposes
if the bank holding company's consolidated business credit exposure to
the individual or company is $1 million or less.
Over-the-counter (OTC) derivative contract means a
derivative contract that is not traded on an exchange that requires the
daily receipt and payment of cash-variation margin.
Probability of default (PD) means:
(1) For a wholesale exposure to a non-defaulted obligor, the bank
holding company's empirically based best estimate of the long-run
average one-year default rate for the rating grade assigned by the bank
holding company to the obligor, capturing the average
default
{{12-31-07 p.6120.56}}experience for obligors in the rating
grade over a mix of economic conditions (including economic downturn
conditions) sufficient to provide a reasonable estimate of the average
one-year default rate over the economic cycle for the rating grade.
(2) For a segment of non-defaulted retail exposures, the bank
holding company's empirically based best estimate of the long-run
average one-year default rate for the exposures in the segment,
capturing the average default experience for exposures in the segment
over a mix of economic conditions (including economic downturn
conditions) sufficient to provide a reasonable estimate of the average
one-year default rate over the economic cycle for the segment and
adjusted upward as appropriate for segments for which seasoning effects
are material. For purposes of this definition, a segment for which
seasoning effects are material is a segment where there is a material
relationship between the time since origination of exposures within the
segment and the bank holding company's best estimate of the long-run
average one-year default rate for the exposures in the segment.
(3) For a wholesale exposure to a defaulted obligor or segment of
defaulted retail exposures, 100 percent.
Protection amount (P) means, with respect to an exposure
hedged by an eligible guarantee or eligible credit derivative, the
effective notional amount of the guarantee or credit derivative,
reduced to reflect any currency mismatch, maturity mismatch, or lack of
restructuring coverage (as provided in section 33 of this appendix).
Publicly traded means traded on:
(1) Any exchange registered with the SEC as a national securities
exchange under section 6 of the Securities Exchange Act of 1934 (15
U.S.C. 78f); or
(2) Any non-U.S.-based securities exchange that:
(i) Is registered with, or approved by, a national securities
regulatory authority; and
(ii) Provides a liquid, two-way market for the instrument in
question, meaning that there are enough independent bona fide offers to
buy and sell so that a sales price reasonably related to the last sales
price or current bona fide competitive bid and offer quotations can be
determined promptly and a trade can be settled at such a price within
five business days.
Qualifying central counterparty means a counterparty (for
example, a clearing house) that:
(1) Facilitates trades between counterparties in one or more
financial markets by either guaranteeing trades or novating contracts;
(2) Requires all participants in its arrangements to be fully
collateralized on a daily basis; and
(3) The bank holding company demonstrates to the satisfaction of
the Federal Reserve is in sound financial condition and is subject to
effective oversight by a national supervisory authority.
Qualifying cross-product master netting agreement means a
qualifying master netting agreement that provides for termination and
close-out netting across multiple types of financial transactions or
qualifying master netting agreements in the event of a counterparty's
default, provided that:
(1) The underlying financial transactions are OTC derivative
contracts, eligible margin loans, or repo-style transactions; and
(2) The bank holding company obtains a written legal opinion
verifying the validity and enforceability of the agreement under
applicable law of the relevant jurisdictions if the counterparty fails
to perform upon an event of default, including upon an event of
bankruptcy, insolvency, or similar proceeding.
Qualifying master netting agreement means any written,
legally enforceable bilateral agreement, provided that:
(1) The agreement creates a single legal obligation for all
individual transactions covered by the agreement upon an event of
default, including bankruptcy, insolvency, or similar proceeding, of
the counterparty;
(2) The agreement provides the bank holding company the right to
accelerate, terminate, and close-out on a net basis all transactions
under the agreement and to liquidate or set off collateral promptly
upon an event of default, including upon an event of bankruptcy,
insolvency, or similar proceeding, of the counterparty, provided that,
in any such case, any exercise of rights under the agreement will not
be stayed or avoided under applicable law in the relevant
jurisdictions;
{{12-31-07 p.6120.57}}
(3) The bank holding company has conducted sufficient legal
review to conclude with a well-founded basis (and maintains sufficient
written documentation of that legal review) that:
(i) The agreement meets the requirements of paragraph (2) of this
definition; and
(ii) In the event of a legal challenge (including one resulting
from default or from bankruptcy, insolvency, or similar proceeding) the
relevant court and administrative authorities would find the agreement
to be legal, valid, binding, and enforceable under the law of the
relevant jurisdictions;
(4) The bank holding company establishes and maintains procedures
to monitor possible changes in relevant law and to ensure that the
agreement continues to satisfy the requirements of this definition; and
(5) The agreement does not contain a walkaway clause (that is, a
provision that permits a non-defaulting counterparty to make a lower
payment than it would make otherwise under the agreement, or no payment
at all, to a defaulter or the estate of a defaulter, even if the
defaulter or the estate of the defaulter is a net creditor under the
agreement).
Qualifying revolving exposure (QRE) means an exposure
(other than a securitization exposure or equity exposure) to an
individual that is managed as part of a segment of exposures with
homogeneous risk characteristics, not on an individual-exposure basis,
and:
(1) Is revolving (that is, the amount outstanding fluctuates,
determined largely by the borrower's decision to borrow and repay, up
to a pre-established maximum amount);
(2) Is unsecured and unconditionally cancelable by the bank
holding company to the fullest extent permitted by Federal law; and
(3) Has a maximum exposure amount (drawn plus undrawn) of up to
$100,000.
Repo-style transaction means a repurchase or reverse
repurchase transaction, or a securities borrowing or securities lending
transaction, including a transaction in which the bank holding company
acts as agent for a customer and indemnifies the customer against loss,
provided that:
(1) The transaction is based solely on liquid and readily
marketable securities, cash, gold, or conforming residential mortgages;
(2) The transaction is marked-to-market daily and subject to
daily margin maintenance requirements;
(3) (i) The transaction is a "securities contract" or
"repurchase agreement" under section 555 or 559, respectively, of
the Bankruptcy Code (11 U.S.C. 555 or 559), a qualified financial
contract under section 11(e)(8) of the Federal Deposit Insurance Act
(12 U.S.C. 1821(e)(8)), or a netting contract between or among
financial institutions under sections 401-407 of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407) or
the Federal Reserve Board's Regulation EE (12 CFR part 231); or
(ii) If the transaction does not meet the criteria set forth in
paragraph (3)(i) of this definition, then either:
(A) The transaction is executed under an agreement that provides
the bank holding company the right to accelerate, terminate, and
close-out the transaction on a net basis and to liquidate or set off
collateral promptly upon an event of default (including upon an event
of bankruptcy, insolvency, or similar proceeding) of the counterparty,
provided that, in any such case, any exercise of rights under the
agreement will not be stayed or avoided under applicable law in the
relevant jurisdictions; or
(B) The transaction is:
(1) Either overnight or unconditionally cancelable at
any time by the bank holding company; and
(2) Executed under an agreement that provides the bank
holding company the right to accelerate, terminate, and close-out the
transaction on a net basis and to liquidate or set off collateral
promptly upon an event of counterparty default; and
(4) The bank holding company has conducted sufficient legal
review to conclude with a well-founded basis (and maintains sufficient
written documentation of that legal review) that the agreement meets
the requirements of paragraph (3) of this definition and is legal,
valid, binding, and enforceable under applicable law in the relevant
jurisdictions.
{{12-31-07 p.6120.58}}
Residential mortgage exposure means an exposure (other
than a securitization exposure, equity exposure, or excluded mortgage
exposure) that is managed as part of a segment of exposures with
homogeneous risk characteristics, not on an individual-exposure basis,
and is:
(1) An exposure that is primarily secured by a first or
subsequent lien on one- to four-family residential property; or
(2) An exposure with an original and outstanding amount of $1
million or less that is primarily secured by a first or subsequent lien
on residential property that is not one to four family.
Retail exposure means a residential mortgage exposure, a
qualifying revolving exposure, or an other retail exposure.
Retail exposure subcategory means the residential
mortgage exposure, qualifying revolving exposure, or other retail
exposure subcategory.
Risk parameter means a variable used in determining
risk-based capital requirements for wholesale and retail exposures,
specifically probability of default (PD), loss given default (LGD),
exposure at default (EAD), or effective maturity (M).
Scenario analysis means a systematic process of obtaining
expert opinions from business managers and risk management experts to
derive reasoned assessments of the likelihood and loss impact of
plausible high-severity operational losses. Scenario analysis may
include the well-reasoned evaluation and use of external operational
loss event data, adjusted as appropriate to ensure relevance to a bank
holding company's operational risk profile and control structure.
SEC means the U.S. Securities and Exchange Commission.
Securitization means a traditional securitization or a
synthetic securitization.
Securitization exposure means an on-balance sheet or
off-balance sheet credit exposure that arises from a traditional or
synthetic securitization (including credit-enhancing representations
and warranties).
Securitization special purpose entity (securitization SPE)
means a corporation, trust, or other entity organized for the
specific purpose of holding underlying exposures of a securitization,
the activities of which are limited to those appropriate to accomplish
this purpose, and the structure of which is intended to isolate the
underlying exposures held by the entity from the credit risk of the
seller of the underlying exposures to the entity.
Senior securitization exposure means a securitization
exposure that has a first priority claim on the cash flows from the
underlying exposures. When determining whether a securitization
exposure has a first priority claim on the cash flows from the
underlying exposures, a bank holding company is not required to
consider amounts due under interest rate or currency derivative
contracts, fees due, or other similar payments. Both the most senior
commercial paper issued by an ABCP program and a liquidity facility
that supports the ABCP program may be senior securitization exposures
if the liquidity facility provider's right to reimbursement of the
drawn amounts is senior to all claims on the cash flows from the
underlying exposures except amounts due under interest rate or currency
derivative contracts, fees due, or other similar payments.
Servicer cash advance facility means a facility under
which the servicer of the underlying exposures of a securitization may
advance cash to ensure an uninterrupted flow of payments to investors
in the securitization, including advances made to cover foreclosure
costs or other expenses to facilitate the timely collection of the
underlying exposures. See also eligible servicer cash advance
facility.
Sovereign entity means a central government (including
the U.S. government) or an agency, department, ministry, or central
bank of a central government.
Sovereign exposure means:
(1) A direct exposure to a sovereign entity; or
(2) An exposure directly and unconditionally backed by the full
faith and credit of a sovereign entity.
Subsidiary means, with respect to a company, a company
controlled by that company.
Synthetic securitization means a transaction in which:
(1) All or a portion of the credit risk of one or more underlying
exposures is transferred to one or more third parties through the use
of one or more credit derivatives or guarantees (other than a guarantee
that transfers only the credit risk of an individual retail
exposure);
{{12-31-07 p.6120.59}}
(2) The credit risk associated with the underlying exposures has
been separated into at least two tranches reflecting different levels
of seniority;
(3) Performance of the securitization exposures depends upon the
performance of the underlying exposures; and
(4) All or substantially all of the underlying exposures are
financial exposures (such as loans, commitments, credit derivatives,
guarantees, receivables, asset-backed securities, mortgage-backed
securities, other debt securities, or equity securities).
Tier 1 capital is defined in 12 CFR part 225, Appendix A,
as modified in part II of this appendix.
Tier 2 capital is defined in 12 CFR part 225, Appendix A,
as modified in part II of this appendix.
Total qualifying capital means the sum of tier 1 capital
and tier 2 capital, after all deductions required in this appendix.
Total risk-weighted assets means:
(1) The sum of:
(i) Credit risk-weighted assets; and
(ii) Risk-weighted assets for operational risk; minus
(2) Excess eligible credit reserves not included in tier 2
capital.
Total wholesale and retail risk-weighted assets means the
sum of risk-weighted assets for wholesale exposures to non-defaulted
obligors and segments of non-defaulted retail exposures; risk-weighted
assets for wholesale exposures to defaulted obligors and segments of
defaulted retail exposures; risk-weighted assets for assets not defined
by an exposure category; and risk-weighted assets for non-material
portfolios of exposures (all as determined in section 31 of this
appendix) and risk-weighted assets for unsettled transactions (as
determined in section 35 of this appendix) minus the amounts deducted
from capital pursuant to 12 CFR part 225, Appendix A (excluding those
deductions reversed in section 12 of this appendix).
Traditional securitization means a transaction in which:
(1) All or a portion of the credit risk of one or more underlying
exposures is transferred to one or more third parties other than
through the use of credit derivatives or guarantees;
(2) The credit risk associated with the underlying exposures has
been separated into at least two tranches reflecting different levels
of seniority;
(3) Performance of the securitization exposures depends upon the
performance of the underlying exposures;
(4) All or substantially all of the underlying exposures are
financial exposures (such as loans, commitments, credit derivatives,
guarantees, receivables, asset-backed securities, mortgage-backed
securities, other debt securities, or equity securities);
(5) The underlying exposures are not owned by an operating
company;
(6) The underlying exposures are not owned by a small business
investment company described in section 302 of the Small Business
Investment Act of 1958 (15 U.S.C. 682); and
(7) The underlying exposures are not owned by a firm an
investment in which qualifies as a community development investment
under 12 U.S.C. 24(Eleventh).
(8) The Federal Reserve may determine that a transaction in which
the underlying exposures are owned by an investment firm that exercises
substantially unfettered control over the size and composition of its
assets, liabilities, and off-balance sheet exposures is not a
traditional securitization based on the transaction's leverage, risk
profile, or economic substance.
(9) The Federal Reserve may deem a transaction that meets the
definition of a traditional securitization, notwithstanding paragraph
(5), (6), or (7) of this definition, to be a traditional securitization
based on the transaction's leverage, risk profile, or economic
substance.
Tranche means all securitization exposures associated
with a securitization that have the same seniority level.
Underlying exposures means one or more exposures that
have been securitized in a securitization transaction.
{{12-31-07 p.6120.60}}
Unexpected operational loss (UOL) means the difference
between the bank holding company's operational risk exposure and the
bank holding company's expected operational loss.
Unit of measure means the level (for example,
organizational unit or operational loss event type) at which the bank
holding company's operational risk quantification system generates a
separate distribution of potential operational losses.
Value-at-Risk (VaR) means the estimate of the maximum
amount that the value of one or more exposures could decline due to
market price or rate movements during a fixed holding period within a
stated confidence interval.
Wholesale exposure means a credit exposure to a company,
natural person, sovereign entity, or governmental entity (other than a
securitization exposure, retail exposure, excluded mortgage exposure,
or equity exposure). Examples of a wholesale exposure include:
(1) A non-tranched guarantee issued by a bank holding company on
behalf of a company;
(2) A repo-style transaction entered into by a bank holding
company with a company and any other transaction in which a bank
holding company posts collateral to a company and faces counterparty
credit risk;
(3) An exposure that a bank holding company treats as a covered
position under 12 CFR part 225, Appendix E for which there is a
counterparty credit risk capital requirement;
(4) A sale of corporate loans by a bank holding company to a
third party in which the bank holding company retains full recourse;
(5) An OTC derivative contract entered into by a bank holding
company with a company;
(6) An exposure to an individual that is not managed by a bank
holding company as part of a segment of exposures with homogeneous risk
characteristics; and
(7) A commercial lease.
Wholesale exposure subcategory means the HVCRE or
non-HVCRE wholesale exposure
subcategory.
Section 3. Minimum Risk-Based Capital Requirements
(a) Except as modified by paragraph (c) of this section or by
section 23 of this appendix, each bank holding company must meet a
minimum ratio of:
(1) Total qualifying capital to total risk-weighted assets of 8.0
percent; and
(2) Tier 1 capital to total risk-weighted assets of 4.0 percent.
(b) Each bank holding company must hold capital commensurate with
the level and nature of all risks to which the bank holding company is
exposed.
(c) When a bank holding company subject to 12 CFR part 225,
Appendix E calculates its risk-based capital requirements under this
appendix, the bank holding company must also refer to 12 CFR part 225,
Appendix E for supplemental rules to calculate risk-based capital
requirements adjusted for market risk.
Part II. Qualifying
Capital
Section 11. Additional Deductions
(a) General. A bank holding company that uses this
appendix must make the same deductions from its tier 1 capital and tier
2 capital required in 12 CFR part 225, Appendix A, except that:
(1) A bank holding company is not required to deduct certain
equity investments and CEIOs (as provided in section 12 of this
appendix); and
(2) A bank holding company also must make the deductions from
capital required by paragraphs (b) and (c) of this section.
(b) Deductions from tier 1 capital. A bank holding
company must deduct from tier 1 capital any gain-on-sale associated
with a securitization exposure as provided in paragraph (a) of section
41 and paragraphs (a)(1), (c), (g)(1), and (h)(1) of section 42 of this
appendix.
(c) Deductions from tier 1 and tier 2 capital. A bank
holding company must deduct the exposures specified in paragraphs
(c)(1) through (c)(7) in this section 50 percent from tier 1 capital
and 50 percent from tier 2 capital. If the amount deductible from tier
2 capital exceeds the bank holding company's actual tier 2 capital,
however, the bank holding company must deduct the excess from tier 1
capital.
{{12-31-07 p.6120.61}}
(1) Credit-enhancing interest-only strips (CEIOs). In
accordance with paragraphs (a)(1) and (c) of section 42 of this
appendix, any CEIO that does not constitute gain-on-sale.
(2) Non-qualifying securitization exposures. In
accordance with paragraphs (a)(4) and (c) of section 42 of this
appendix, any securitization exposure that does not qualify for the
Ratings-Based Approach, the Internal Assessment Approach, or the
Supervisory Formula Approach under sections 43, 44, and 45 of this
appendix, respectively.
(3) Securitizations of non-IRB exposures. In
accordance with paragraphs (c) and (g)(4) of section 42 of this
appendix, certain exposures to a securitization any underlying exposure
of which is not a wholesale exposure, retail exposure, securitization
exposure, or equity exposure.
(4) Low-rated securitization exposures. In accordance
with section 43 and paragraph (c) of section 42 of this appendix, any
securitization exposure that qualifies for and must be deducted under
the Ratings-Based Approach.
(5) High-risk securitization exposures subject to the
Supervisory Formula Approach. In accordance with paragraphs (b)
and (c) of section 45 of this appendix and paragraph (c) of section 42
of this appendix, certain high-risk securitization exposures (or
portions thereof) that qualify for the Supervisory Formula Approach.
(6) Eligible credit reserves shortfall. In accordance
with paragraph (a)(1) of section 13 of this appendix, any eligible
credit reserves shortfall.
(7) Certain failed capital markets transactions. In
accordance with paragraph (e)(3) of section 35 of this appendix, the
bank holding company's exposure on certain failed capital markets
transactions.
(8) A bank holding company must also deduct an amount equal to
the minimum regulatory capital requirement established by the regulator
of any insurance underwriting subsidiary of the holding company. For
U.S.-based insurance underwriting subsidiaries, this amount generally
would be 200 percent of the subsidiary's Authorized Control Level as
established by the appropriate state regulator of the insurance
company.
Section 12. Deductions and Limitations Not Required
(a) Deduction of CEIOs. A bank holding company is not
required to make the deductions from capital for CEIOs in 12 CFR part
225, Appendix A, section II.B.1.e.
(b) Deduction for certain equity investments. A bank
holding company is not required to make the deductions from capital for
nonfinancial equity investments in 12 CFR part 225, Appendix A, section
II.B.5.
Section 13. Eligible Credit Reserves
(a) Comparison of eligible credit reserves to expected credit
losses--(1) Shortfall of eligible credit reserves. If
a bank holding company's eligible credit reserves are less than the
bank holding company's total expected credit losses, the bank holding
company must deduct the shortfall amount 50 percent from tier 1 capital
and 50 percent from tier 2 capital. If the amount deductible from tier
2 capital exceeds the bank holding company's actual tier 2 capital, the
bank holding company must deduct the excess amount from tier 1 capital.
(2) Excess eligible credit reserves. If a bank holding
company's eligible credit reserves exceed the bank holding company's
total expected credit losses, the bank holding company may include the
excess amount in tier 2 capital to the extent that the excess amount
does not exceed 0.6 percent of the bank holding company's
credit-risk-weighted assets.
(b) Treatment of allowance for loan and lease losses.
Regardless of any provision in 12 CFR part 225, Appendix A, the ALLL is
included in tier 2 capital only to the extent provided in paragraph
(a)(2) of this section and in section 24 of this appendix.
Part III. Qualification
Section 21. Qualification Process
(a) Timing. (1) A bank holding company that is described
in paragraph (b)(1) of section 1 of this appendix must adopt a written
implementation plan no later than six months after the later of April
1, 2008, or the date the bank holding company meets a criterion in that
section. The implementation plan must incorporate an explicit first
floor period start date no
{{12-31-07 p.6120.62}}later than 36 months after the later of
April 1, 2008, or the date the bank holding company meets at least one
criterion under paragraph (b)(1) of section 1 of this appendix. The
Federal Reserve may extend the first floor period start date.
(2) A bank holding company that elects to be subject to this
appendix under paragraph (b)(2) of section 1 of this appendix must
adopt a written implementation plan.
(b) Implementation plan. (1) The bank holding company's
implementation plan must address in detail how the bank holding company
complies, or plans to comply, with the qualification requirements in
section 22 of this appendix. The bank holding company also must
maintain a comprehensive and sound planning and governance process to
oversee the implementation efforts described in the plan. At a minimum,
the plan must:
(i) Comprehensively address the qualification requirements in
section 22 of this appendix for the bank holding company and each
consolidated subsidiary (U.S. and foreign-based) of the bank holding
company with respect to all portfolios and exposures of the bank
holding company and each of its consolidated subsidiaries;
(ii) Justify and support any proposed temporary or permanent
exclusion of business lines, portfolios, or exposures from application
of the advanced approaches in this appendix (which business lines,
portfolios, and exposures must be, in the aggregate, immaterial to the
bank holding company);
(iii) Include the bank holding company's self-assessment of:
(A) The bank holding company's current status in meeting the
qualification requirements in section 22 of this appendix; and
(B) The consistency of the bank holding company's current
practices with the Federal Reserve's supervisory guidance on the
qualification requirements;
(iv) Based on the bank holding company's self-assessment,
identify and describe the areas in which the bank holding company
proposes to undertake additional work to comply with the qualification
requirements in section 22 of this appendix or to improve the
consistency of the bank holding company's current practices with the
Federal Reserve's supervisory guidance on the qualification
requirements (gap analysis);
(v) Describe what specific actions the bank holding company will
take to address the areas identified in the gap analysis required by
paragraph (b)(1)(iv) of this section;
(vi) Identify objective, measurable milestones, including
delivery dates and a date when the bank holding company's
implementation of the methodologies described in this appendix will be
fully operational;
(vii) Describe resources that have been budgeted and are
available to implement the plan; and
(viii) Receive approval of the bank holding company's board of
directors.
(2) The bank holding company must submit the implementation plan,
together with a copy of the minutes of the board of directors'
approval, to the Federal Reserve at least 60 days before the bank
holding company proposes to begin its parallel run, unless the Federal
Reserve waives prior notice.
(c) Parallel run. Before determining its risk-based
capital requirements under this appendix and following adoption of the
implementation plan, the bank holding company must conduct a
satisfactory parallel run. A satisfactory parallel run is a period of
no less than four consecutive calendar quarters during which the bank
holding company complies with the qualification requirements in section
22 of this appendix to the satisfaction of the Federal Reserve. During
the parallel run, the bank holding company must report to the Federal
Reserve on a calendar quarterly basis its risk-based capital ratios
using 12 CFR part 225, Appendix A and the risk-based capital
requirements described in this appendix. During this period, the bank
holding company is subject to 12 CFR part 225, Appendix A.
(d) Approval to calculate risk-based capital requirements
under this appendix. The Federal Reserve will notify the bank
holding company of the date that the bank holding company may begin its
first floor period if the Federal Reserve determines that:
(1) The bank holding company fully complies with all the
qualification requirements in section 22 of this appendix;
(2) The bank holding company has conducted a satisfactory
parallel run under paragraph (c) of this section; and
(3) The bank holding company has an adequate process to ensure
ongoing compliance with the qualification requirements in section 22 of
this appendix.
{{12-31-07 p.6120.63}}
(e) Transitional floor periods. Following a satisfactory
parallel run, a bank holding company is subject to three transitional
floor periods.
(1) Risk-based capital ratios during the transitional floor
periods--(i) Tier 1 risk-based capital ratio. During a
bank holding company's transitional floor periods, the bank holding
company's tier 1 risk-based capital ratio is equal to the lower of:
(A) The bank holding company's floor-adjusted tier 1 risk-based
capital ratio; or
(B) The bank holding company's advanced approaches tier 1
risk-based capital ratio.
(ii) Total risk-based capital ratio. During a bank
holding company's transitional floor periods, the bank holding
company's total risk-based capital ratio is equal to the lower of:
(A) The bank holding company's floor-adjusted total risk-based
capital ratio; or
(B) The bank holding company's advanced approaches total
risk-based capital ratio.
(2) Floor-adjusted risk-based capital ratios. (i) A
bank holding company's floor-adjusted tier 1 risk-based capital ratio
during a transitional floor period is equal to the bank holding
company's tier 1 capital as calculated under 12 CFR part 225, Appendix
A, divided by the product of:
(A) The bank holding company's total risk-weighted assets as
calculated under 12 CFR part 225, Appendix A; and
(B) The appropriate transitional floor percentage in Table 1.
(ii) A bank holding company's floor-adjusted total risk-based
capital ratio during a transitional floor period is equal to the sum of
the bank holding company's tier 1 and tier 2 capital as calculated
under 12 CFR part 225, Appendix A, divided by the product of:
(A) The bank holding company's total risk-weighted assets as
calculated under 12 CFR part 225, Appendix A; and
(B) The appropriate transitional floor percentage in Table 1.
(iii) A bank holding company that meets the criteria in paragraph
(b)(1) or (b)(2) of section 1 of this appendix as of April 1, 2008,
must use 12 CFR part 225, Appendix A during the parallel run and as the
basis for its transitional floors.
Table 1 — Transitional
Floors
| Transitional floor period |
Transitional floor
percentage |
|---|
| First floor period |
95 percent |
| Second floor
period |
90 percent |
| Third floor period |
85 percent
|
(3) Advanced approaches risk-based capital
ratios. (i) A bank holding company's advanced approaches tier 1
risk-based capital ratio equals the bank holding company's tier 1
risk-based capital ratio as calculated under this appendix (other than
this section on transitional floor periods).
(ii) A bank holding company's advanced approaches total
risk-based capital ratio equals the bank holding company's total
risk-based capital ratio as calculated under this appendix (other than
this section on transitional floor periods).
(4) Reporting. During the transitional floor periods,
a bank holding company must report to the Federal Reserve on a calendar
quarterly basis both floor-adjusted risk-based capital ratios and both
advanced approaches risk-based capital ratios.
(5) Exiting a transitional floor period. A bank
holding company may not exit a transitional floor period until the bank
holding company has spent a minimum of four consecutive calendar
quarters in the period and the Federal Reserve has determined that the
bank holding company may exit the floor period. The Federal Reserve's
determination will be based on an assessment of the bank holding
company's ongoing compliance with the qualification requirements in
section 22 of this appendix.
(6) Interagency study. After the end of the second
transition year (2010), the Federal banking agencies will publish a
study that evaluates the advanced approaches to determine if there are
any material deficiencies. For any primary Federal supervisor to
authorize any institution to exit the third transitional floor period,
the study must determine that there are
{{12-31-07 p.6120.64}}no such material deficiencies that
cannot be addressed by then-existing tools, or, if such deficiencies
are found, they are first remedied by changes to this appendix.
Notwithstanding the preceding sentence, a primary Federal supervisor
that disagrees with the finding of material deficiency may not
authorize any institution under its jurisdiction to exit the third
transitional floor period unless it provides a public report explaining
its reasoning.
Section 22. Qualification Requirements
(a) Process and systems requirements. (1) A bank holding
company must have a rigorous process for assessing its overall capital
adequacy in relation to its risk profile and a comprehensive strategy
for maintaining an appropriate level of capital.
(2) The systems and processes used by a bank holding company for
risk-based capital purposes under this appendix must be consistent with
the bank holding company's internal risk management processes and
management information reporting systems.
(3) Each bank holding company must have an appropriate
infrastructure with risk measurement and management processes that meet
the qualification requirements of this section and are appropriate
given the bank holding company's size and level of complexity.
Regardless of whether the systems and models that generate the risk
parameters necessary for calculating a bank holding company's
risk-based capital requirements are located at any affiliate of the
bank holding company, the bank holding company itself must ensure that
the risk parameters and reference data used to determine its risk-based
capital requirements are representative of its own credit risk and
operational risk exposures.
(b) Risk rating and segmentation systems for wholesale and
retail exposures.
(1) A bank holding company must have an internal risk rating and
segmentation system that accurately and reliably differentiates among
degrees of credit risk for the bank holding company's wholesale and
retail exposures.
(2) For wholesale exposures:
(i) A bank holding company must have an internal risk rating
system that accurately and reliably assigns each obligor to a single
rating grade (reflecting the obligor's likelihood of default). A bank
holding company may elect, however, not to assign to a rating grade an
obligor to whom the ba
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