FDIC Federal Register Citations

[Federal Register: October 1, 2003 (Volume 68, Number 190)]

[Proposed Rules]

[Page 56568-56586]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr01oc03-30]

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Proposed Rules

Federal Register

________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of

the proposed issuance of rules and regulations. The purpose of these

notices is to give interested persons an opportunity to participate in

the rule making prior to the adoption of the final rules.

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[[Page 56568]]

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket No. 03-22]

RIN 1557-AC77

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

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

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AC75

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

[No. 2003-47]

RIN 1550-AB81

Risk-Based Capital Guidelines; Capital Adequacy Guidelines;

Capital Maintenance: Asset-Backed Commercial Paper Programs and Early

Amortization Provisions

AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of

Governors of the Federal Reserve System; Federal Deposit Insurance

Corporation; and Office of Thrift Supervision, Treasury.

ACTION: Joint notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency (OCC), Board of

Governors of the Federal Reserve System (Board), Federal Deposit

Insurance Corporation (FDIC), and Office of Thrift Supervision (OTS)

(collectively, the agencies) are proposing to amend their risk-based

capital standards by removing a sunset provision in order to permit

sponsoring banks, bank holding companies, and thrifts (collectively,

sponsoring banking organizations) to continue to exclude from their

risk-weighted asset base those assets in asset-backed commercial paper

(ABCP) programs that are consolidated onto sponsoring banking

organizations' balance sheets as a result of a recently issued

accounting interpretation, Financial Accounting Standards Board

Interpretation No. 46, Consolidation of Variable Interest Entities (FIN

46). The removal of the sunset provision is contingent upon the

agencies implementing alternative, more risk-sensitive risk-based

capital requirements for credit exposures arising from involvement with

ABCP programs. See Section I of the SUPPLEMENTARY INFORMATION for

discussion of a related joint interim final rule published concurrently

with this notice of proposed rulemaking.

The agencies also are proposing to require banking organizations to

hold risk-based capital against liquidity facilities with an original

maturity of one year or less that organizations provide to ABCP

programs, regardless of whether the organization sponsors the program

or must consolidate the program under GAAP. This treatment recognizes

that such facilities expose banking organizations to credit risk and is

consistent with the industry's practice of internally allocating

economic capital against this risk associated with such facilities. A

separate capital charge on liquidity facilities provided to an ABCP

program would not be required if a banking organization must or chooses

to consolidate the program for purposes of risk-based capital.

In addition, the agencies are proposing a risk-based capital charge

for certain types of securitizations of revolving retail credit

facilities (for example, credit card receivables) that incorporate

early amortization provisions. The effect of these capital proposals

will be to more closely align the risk-based capital requirements with

the associated risk of the exposures.

Finally, the agencies are proposing to amend their risk-based

capital standards by deleting tables and attachments that summarize

risk categories, credit conversion factors, and transitional

arrangements.

DATES: Comments on the joint notice of proposed rulemaking must be

received by November 17, 2003.

ADDRESSES: Comments should be directed to:

OCC: You should send comments to the Public Information Room,

Office of the Comptroller of the Currency, Mailstop 1-5, Attention:

Docket No. 03-22, 250 E Street, SW., Washington, DC 20219. Due to

delays in the delivery of paper mail in the Washington area and at the

OCC, commenters are encouraged to submit comments by fax or e-mail.

Comments may be sent by fax to (202) 874-4448, or by e-mail to regs.comments@occ.treas.gov.

You can make an appointment to inspect and photocopy the comments by calling the Public

Information Room at (202) 874-5043.

Board: Comments should refer to Docket No. R-1162 and may be mailed

to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the

Federal Reserve System, 20th and Constitution Avenue, NW., Washington,

DC 20551. However, because paper mail in the Washington area and at the

Board of Governors is subject to delay, please consider submitting your comments by e-mail to

regs.comments@federalreserve.gov, or faxing them

to the Office of the Secretary at 202/452-3819 or 202/452-3102. Members

of the public may inspect comments in Room MP-500 of the Martin

Building between 9 a.m. and 5 p.m. weekdays pursuant to Sec. 261.12,

except as provided in Sec. 261.14, of the Board's Rules Regarding

Availability of Information, 12 CFR 261.12 and 261.14.

FDIC: Written comments should be addressed to Robert E. Feldman,

Executive Secretary, Attention: Comments/OES, Federal Deposit Insurance

Corporation, 550 17th Street, NW., Washington, DC 20429. Comments may

be hand delivered to the guard station at the rear of the 550 17th

Street Building (located on F Street), on business days between 7 a.m.

and 5 p.m. (Fax number: (202) 898-3838; Internet address: comments@fdic.gov).

Comments may be inspected and photocopied in the

FDIC Public Information Center, Room 100, 801 17th Street, NW.,

Washington, DC, between 9 a.m. and 4:30 p.m. on business days.

OTS: Send comments to Regulation Comments, Chief Counsel's Office,

Office of Thrift Supervision, 1700 G

[[Page 56569]]

Street, NW., Washington, DC 20552, Attention: No. 2003-47.

Delivery: Hand deliver comments to the Guard's Desk, East Lobby

Entrance, 1700 G Street, NW., from 9 a.m. to 4 p.m. on business days,

Attention: Regulation Comments, Chief Counsel's Office, Attention: No.

2003-47.

Facsimiles: Send facsimile transmissions to FAX Number (202) 906-

6518, Attention: No. 2003-47. E-Mail: Send e-mails to regs.comments@ots.treas.gov,

Attention: No. 2003-47 and include your name and telephone number. Due to temporary

disruptions in mail service in the Washington, DC area, commenters are

encouraged to send comments by fax or e-mail, if possible.

Availability of comments: OTS will post comments and the related

index on the OTS Internet Site at http://www.ots.treas.gov. In

addition, you may inspect comments at the Public Reading Room, 1700 G

Street, NW., by appointment. To make an appointment for access, call (202) 906-5922, send an e-mail to

public.info@ots.treas.gov, or send a facsimile transmission to (202) 906-7755.

(Please identify the materials you would like to inspect to assist us in serving you.) We

schedule appointments on business days between 10 a.m. and 4 p.m. In

most cases, appointments will be available the business day after the

date we receive a request.

FOR FURTHER INFORMATION CONTACT:

OCC: Amrit Sekhon, Risk Expert, Capital Policy Division, (202) 874-

5211; Mauricio Claver-Carone, Attorney, or Ron Shimabukuro, Special

Counsel, Legislative and Regulatory Activities Division, (202) 874-

5090, Office of the Comptroller of the Currency, 250 E Street, SW.,

Washington, DC 20219.

Board: Thomas R. Boemio, Senior Supervisory Financial Analyst,

(202) 452-2982, David Kerns, Supervisory Financial Analyst, (202) 452-

2428, Barbara Bouchard, Assistant Director, (202) 452-3072, Division of

Banking Supervision and Regulation; or Mark E. Van Der Weide, Counsel,

(202) 452-2263, Legal Division. For the hearing impaired only,

Telecommunication Device for the Deaf (TDD), (202) 263-4869.

FDIC: Jason C. Cave, Chief, Policy Section, Capital Markets Branch,

(202) 898-3548, Robert F. Storch, Chief Accountant, (202) 898-8906,

Division of Supervision and Consumer Protection; Michael B. Phillips,

Counsel, (202) 898-3581, Supervision and Legislation Branch, Legal

Division, Federal Deposit Insurance Corporation, 550 17th Street, NW.,

Washington, DC 20429.

OTS: Michael D. Solomon, Senior Program Manager for Capital Policy,

(202) 906-5654, David W. Riley, Project Manager, Supervision Policy,

(202) 906-6669; or Teresa A. Scott, Counsel (Banking and Finance),

(202) 906-6478, Office of Thrift Supervision, 1700 G Street, NW,

Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Asset-Backed Commercial Paper Programs

Background

An asset-backed commercial paper (ABCP) program typically is a

program through which a banking organization provides funding to its

corporate customers by sponsoring and administering a bankruptcy-remote

special purpose entity that purchases asset pools from, or extends

loans to, those customers. The asset pools in an ABCP program might

include, for example, trade receivables, consumer loans, or asset-

backed securities. The ABCP program raises cash to provide funding to

the banking organization's customers through the issuance of commercial

paper into the market. Typically, the sponsoring banking organization

provides liquidity and credit enhancements to the ABCP program, which

aid the program in obtaining high quality credit ratings that

facilitate the issuance of the commercial paper.\1\

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\1\ For the purposes of this proposed rule, a banking

organization is considered the sponsor of an ABCP program if it

establishes the program; approves the sellers permitted to

participate in the program; approves the asset pools to be purchased

by the programs; or administers the ABCP progam by monitoring the

assets, arranging for debt placement, compiling monthly reports, or

ensuring compliance with the program documents and with the

program's credit and investment policy.

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In January 2003, the Financial Accounting Standards Board (FASB)

issued interpretation No. 46, ``Consolidation of Variable Interest

Entities'' (FIN 46), requiring the consolidation of variable interest

entities (VIEs) onto the balance sheets of companies deemed to be the

primary beneficiaries of those entities.\2\ FIN 46 likely will result

in the consolidation of many ABCP programs onto the balance sheets of

banking organizations beginning in the third quarter of 2003. In

contrast, under pre-FIN 46 accounting standards, the sponsors of ABCP

programs normally have not been required to consolidate the assets of

these programs. Banking organizations that are required to consolidate

ABCP program assets will have to include all of the program assets

(mostly receivables and securities) and liabilities (mainly commercial

paper) on their September 30, 2003 balance sheets for purposes of the

bank Reports of Condition and Income (Call Report), the Thrift

Financial Report (TFR), and the bank holding company financial

statements (FR Y-9C Report). If no changes were made to regulatory

capital standards, the resulting increase in the asset base would lower

both the tier 1 leverage and risk-based capital ratios of banking

organizations that must consolidate the assets held in ABCP programs.

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\2\ Under FIN 46, the FASB broadened the criteria for

determining when one entity is deemed to have a controlling

financial interest in another entity and, therefore, when an entity

must consolidate another entity in its financial statements. An

entity generally does not need to be analyzed under FIN 46 if it is

designed to have ``adequate capital,'' as described in FIN 46, and

its shareholders control the entity with their share votes and are

allocated its profits and losses. If the entity fails these

criteria, it typically is deemed a VIE and each stakeholder in the

entity (a group that can include, but is not limited to, legal-form

equity holders, creditors, sponsors, guarantors, and servicers) must

assess whether it is the entity's ``primary beneficiary'' using the

FIN 46 criteria. This analysis considers whether effective control

exists by evaluating the entity's risks and rewards. In the end, the

stakeholder who holds the majority of the entity's risks or rewards

is the primary beneficiary and must consolidate the VIE.

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The agencies believe that the consolidation of ABCP program assets

could result in risk-based capital requirements that do not

appropriately reflect the risks faced by banking organizations involved

with these programs. In the view of the agencies, banking organizations

generally face limited risk exposure to ABCP programs. This risk

usually is confined to the credit enhancements and liquidity facility

arrangements that banking organizations provide to these programs. In

addition, operational controls and structural provisions, along with

overcollateralization or other credit enhancements provided by the

companies that sell assets into ABCP programs mitigate the risk to

which sponsoring banking organizations are exposed.

Because of the limited risks, in a related joint interim rule

published elsewhere in today's Federal Register, the agencies amended

their risk-based capital standards to permit sponsoring banking

organizations to exclude ABCP program assets that must be consolidated

by the organization under FIN 46 from risk-weighted assets for purposes

of calculating the risk-based capital ratios through the end of the

first quarter of 2004. The agencies also amended their risk-based

capital rules to exclude from tier 1 and total risk-based capital any

minority interest in sponsored ABCP programs that are

[[Page 56570]]

consolidated under FIN 46. Exclusion of minority interests associated

with consolidated ABCP programs is appropriate when such programs'

assets are not included in a sponsoring organization's risk-weighted

asset base and, thus, are not assessed a risk-based capital charge.

This interim risk-based capital treatment will expire on April 1, 2004.

The period during which the interim rule is in effect provides the

agencies with additional time to develop appropriate risk-based capital

requirements for banking organizations' sponsorship and other

involvement with ABCP programs and to receive comments from the

industry on this proposal.

The interim risk-based capital treatment does not alter any

accounting requirements as established by GAAP or the manner in which

banking organizations report consolidated on-balance sheet assets. In

addition, the risk-based capital treatment set forth in the interim

final rule and its proposed continuation in this joint notice of

proposed rulemaking does not affect the denominator of the tier 1

leverage capital ratio, which would continue to be based primarily on

on-balance sheet assets as reported under GAAP. Thus, as a result of

FIN 46, banking organizations must include all assets of consolidated

ABCP programs in on-balance sheet assets for purposes of calculating

the tier 1 leverage capital ratio.

In contrast to most other cases where minority interests in

consolidated subsidiaries are included as a component of tier 1 capital

and, hence, are incorporated into the tier 1 leverage capital ratio

calculation, minority interests related to sponsoring banking

organizations' ABCP program assets consolidated as a result of FIN 46

are not to be included in tier 1 capital. Thus, the reported tier 1

leverage capital ratio for a sponsoring banking organization would

likely be lower than it would be if only the ABCP program assets were

consolidated. The agencies do not anticipate that the exclusion of

minority interests related to consolidated ABCP programs assets would

significantly affect the tier 1 leverage capital ratio of sponsoring

banking organizations because the amount of equity in ABCP programs

generally is small relative to the capital levels of the sponsoring

organizations.

Proposed Risk-Based Capital Treatment for ABCP Exposures

In this notice of proposed rulemaking, the agencies are proposing

to amend their risk-based capital standards by removing the April 1,

2004 sunset provision so that ABCP program assets consolidated under

FIN 46 and any associated minority interests continue to be excluded

from risk-weighted assets and tier 1 capital, respectively, when

sponsoring banking organizations calculate their tier 1 and total risk-

based capital ratios. The proposed removal of the sunset provision is

contingent upon the agencies implementing an alternative, more risk-

sensitive approach to the risk exposures arising from ABCP programs.

Accordingly, the agencies are proposing to amend their risk-based

capital requirements to assess more appropriate capital charges against

the credit exposures that arise from ABCP programs, including liquidity

facilities with an original maturity of one year or less (that is,

short-term liquidity facilities). The agencies believe that this

proposal would result in a capital requirement that is more

commensurate with the credit risk to which banking organizations are

exposed as a result of their sponsorship and other involvement with

ABCP programs. The capital charge for short-term liquidity facilities

that are provided to ABCP programs generally would apply even if FIN 46

would not require the program to be consolidated.

Liquidity facilities extended to ABCP programs are commitments to

lend to, or purchase assets from, the programs in the event that funds

are needed to repay maturing commercial paper. Typically, this need for

liquidity is due to a timing mismatch between cash collections on the

underlying assets in the program and scheduled repayments of the

commercial paper issued by the program. Currently, liquidity facilities

with an original maturity of over one year (that is, long-term

liquidity facilities) are converted to an on-balance sheet credit

equivalent amount using the 50 percent credit conversion factor. Short-

term liquidity facilities are converted to an on-balance sheet credit

equivalent amount utilizing the zero percent credit conversion factor.

As a result, such short-term facilities currently are not subject to a

risk-based capital charge.

In the agencies' view, a banking organization that provides

liquidity facilities to ABCP programs is exposed to credit risk

regardless of the tenure of the liquidity facilities. For example, an

ABCP program may draw on a liquidity facility at the first sign of

deterioration in the credit quality of an asset pool to buy out the

assets and remove them from the program. In such an event, a draw

exposes the banking organization providing the liquidity facility to

credit risk. The agencies believe that the existing risk-based capital

rules do not adequately reflect the risks associated with short-term

liquidity facilities extended to ABCP programs.

Although the agencies are of the view that liquidity facilities

expose banking organizations to credit risk, the agencies also believe

that the short tenure of commitments with an original maturity of one

year or less exposes banking organizations to a lower degree of credit

risk than longer tenure commitments. This difference in degree of

credit risk exposure should be reflected in any potential capital

requirement. The agencies, therefore, are proposing to convert short-

term liquidity facilities provided to ABCP programs to on-balance sheet

credit equivalent amounts utilizing the 20 percent credit conversion

factor, as opposed to the 50 percent credit conversion factor applied

to commitments with an original maturity of greater than one year. This

amount would then be risk-weighted according to the underlying assets

or the obligor, after considering any collateral or guarantees, or

external credit ratings, if applicable. For example, if a short-term

liquidity facility provided to an ABCP program covered an asset-backed

security (ABS) externally rated AAA, then the amount of the security

would be converted at 20 percent to an on-balance sheet credit

equivalent amount and assigned to the 20 percent risk category

appropriate for AAA-rated ABS.\3\

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\3\ See 12 CFR part 3, appendix A, Section 4(d) (OCC); 12 CFR

parts 208 and 225, appendix A, III.B.3.c. (FRB); 12 CFR part 325,

appendix A, II.B.5.d. (FDIC); 12 CFR 567.6(b) (OTS).

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In many cases, a banking organization may have multiple exposures

that may be drawn under varying circumstances within a single ABCP

program (for example, both a credit enhancement and a liquidity

facility). The agencies do not intend to subject a banking organization

to duplicative risk-based capital requirements against these multiple

exposures where they overlap and cover the same underlying asset pool.

Rather, a banking organization must hold risk-based capital only once

for the position covered by the overlapping exposures. Where the

overlapping exposures are subject to different risk-based capital

requirements, the banking organization must apply the risk-based

capital treatment resulting in the highest capital charge to the

overlapping portion of the exposures.

For example, assume a banking organization provides a program-wide

credit enhancement covering 10 percent of the underlying asset pools in

an ABCP program and pool-specific liquidity facilities covering 100

percent

[[Page 56571]]

of each of the underlying asset pools. The banking organization would

be required to hold capital against 10 percent of the underlying asset

pools because it is providing the program-wide credit enhancement. The

banking organization also would be required to hold capital against 90

percent of the liquidity facilities it is providing to each of the

underlying asset pools. Moreover, if a banking organization had to

consolidate ABCP program assets onto its balance sheet for risk-based

capital purposes because, for example, the organization was not the

sponsor of the program, the organization would not be required also to

hold risk-based capital against any credit enhancements or liquidity

facilities that cover those same program assets.

If different banking organizations provide overlapping exposures,

however, each organization must hold capital against the entire maximum

amount of its exposure. As a result, while duplication of capital

charges will not occur for individual banking organizations, it may

occur where multiple banking organizations have overlapping exposures

to the same ABCP program.

The agencies also are proposing that banking organizations that are

subject to the market risk capital rules would not be permitted to

apply those rules to any liquidity facilities held in the trading book.

Rather, organizations will be required to convert the notional amount

of all liquidity facilities to ABCP programs using the appropriate

credit conversion factor to determine the credit equivalent amount for

liquidity facilities that are structured or characterized as

derivatives or other trading book assets. Thus, for example, all

liquidity facilities to ABCP programs with an original maturity of one

year or less will be subject to a 20 percent conversion factor as

described above, regardless of whether the exposure is carried in the

trading account or the banking book. The agencies request comment on

this prohibition and its implications.

In order for a liquidity facility, either short-or long-term,

provided to an ABCP program not to be considered a recourse obligation

or a direct credit substitute, draws on the facility must be subject to

a reasonable asset quality test that precludes funding assets that are

60 days or more past due or in default. Assets that are past due 60

days or more generally are considered ineligible for financing based

upon standard industry practice and rating agency guidelines for trade

receivables. The funding of assets past due 60 days or more using a

liquidity facility exposes the institution to a greater degree of

credit risk compared to the purchase of assets of a more current

nature. It is the agencies' view that liquidity facilities that are

eligible for the 20 percent or 50 percent conversion factors should not

be used to fund assets with the higher degree of credit risk typically

associated with seriously delinquent assets.

In addition, if the assets a banking organization would be required

to fund pursuant to a liquidity facility are initially externally rated

exposures, the facility can be used to fund only those exposures that

are externally rated investment grade at the time of funding.

Furthermore, the liquidity facility must contain provisions that, prior

to any draws, reduce the banking organization's funding obligation to

cover only those assets that would meet the funding criteria under the

facility's asset quality tests. In other words, the amount of coverage

provided by the liquidity facility must decrease as assets that meet

the asset quality test decrease so that the liquidity facility would

cover only those assets satisfying the asset quality test. If the asset

quality tests were violated, the liquidity facility would be considered

a direct credit substitute and would be converted at 100 percent as

opposed to 20 or 50 percent.

Additional Risk-Based Capital Considerations

The agencies recognize that FIN 46 may affect whether consolidation

is required of other VIE structures in addition to ABCP programs

sponsored by banking organizations. While the current proposal would

permit banking organizations to exclude from risk-weighted assets only

sponsored ABCP program assets, the agencies seek comment on whether

other structures or asset types affected by FIN 46 should be eligible

for risk-based capital treatment similar to that proposed for banking

organization-sponsored ABCP program assets. In addition, the agencies

request feedback on whether banking organizations expect any

difficulties in tracking these consolidated ABCP program assets on an

ongoing basis. The agencies also request comment on any alternative

regulatory capital approaches that should be considered, beyond what

has been proposed.

II. Early Amortization Capital Charge

The Agencies also are seeking comment on the assessment of a risk-

based capital charge against the risks associated with early

amortization, a common feature in securitizations of revolving retail

credit exposures (for example, credit card receivables). When assets

are securitized, the extent to which the selling or sponsoring entity

transfers the risks associated with the assets depends on the structure

of the securitization and the nature of the underlying assets. The

early amortization provision often present in securitizations of

revolving retail credit facilities increases the likelihood that

investors will be repaid before being subject to any risk of

significant credit losses. For example, if a securitized asset pool

begins to experience credit deterioration to the point where the early

amortization provision is triggered, then the asset-backed securities

begin to pay down rapidly. This occurs because, after an early

amortization provision is triggered, if new receivables are generated

from the accounts designated to the securitization trust, they are no

longer sold to investors, but instead are retained on the sponsoring

banking organization's balance sheet.

Early amortization provisions raise several distinct concerns about

the risks to selling banking organizations. First, the seller's

interest in the securitized assets effectively is subordinated to the

interests of the investors by the payment allocation formula applied

during early amortization. Investors effectively get paid first, and,

as a result, the seller's residual interest likely will absorb a

disproportionate share of credit losses.

Second, early amortization can create liquidity problems for

selling organizations. For example, a credit card issuer must fund a

steady stream of new credit card receivables when a securitization

trust is no longer able to purchase new receivables due to early

amortization. The selling organization must either find an alternative

buyer for the receivables or else the receivables will accumulate on

the seller's balance sheet, creating the need for another source of

funding and potentially the need for additional regulatory capital.

Third, the first two risks to the selling banking organization can

create an incentive for the seller to provide implicit support to the

securitization transaction--credit enhancement beyond any pre-existing

contractual obligations--to prevent an early amortization. Incentives

to provide implicit support are, to some extent, present in other types

of securitizations because of concerns about damage to the selling

organization's reputation and its ability to securitize assets going

forward if one of its transactions performs poorly. However, the early

amortization provision creates additional and more direct financial

incentives to prevent early amortization through the provision of

implicit support.

[[Page 56572]]

This is not the first time that the agencies have addressed the

question of whether to impose a capital charge on securitizations of

revolving credit exposures incorporating early amortization provisions.

On March 8, 2000, the agencies published a notice of proposed

rulemaking on recourse and direct credit substitutes (65 FR 12320). In

that proposal, the agencies proposed a fixed conversion factor of 20

percent to be applied to the amount of assets under management in all

revolving securitizations that contained early amortization features,

in recognition of the risks associated with these structures. The

agencies acknowledge that the March 2000 proposal was not particularly

risk sensitive and would have required the same amount of capital for

all securitizations of revolving credit exposures that contained early

amortization features, regardless of the risk present in the

securitization transaction. In a subsequent November 2001 rulemaking

(66 FR 59614), which implemented many of the proposals in the March

2000 proposal, the agencies reiterated their concerns with early

amortization, indicating that the risks associated with securitization,

including those posed by an early amortization feature, are not fully

captured in the current capital rules.

In the interim, the Basel Committee on Banking Supervision (BSC)

has set forth a more risk-sensitive proposal that would assess capital

against securitizations of revolving exposures with early amortization

features based on key indicators of risk, such as excess spread levels.

Virtually all securitizations of revolving retail credit facilities

that include early amortization provisions rely on excess spread as an

early amortization trigger. For example, early amortization generally

commences once excess spread falls below zero for a given period of

time. International supervisors recognize that there is a connection

between early amortization and excess spread levels. In a separate

rulemaking, the agencies currently are seeking comment on the proposals

the BSC has set forth for large, internationally active banking

organizations.\4\ The risk-based capital charge, on which comment is

sought in this proposed rulemaking for the exposures arising from early

amortization structures, is based on the proposal set forth by the

Basel Supervisors Committee.\5\

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\4\ On August 4, 2003, the agencies published an advanced notice

of proposed rulemaking (ANPR) in the Federal Register seeking public

comment on the implementation of the new Basel Capital Accord in the

United States. The ANPR presents an overview of the proposed

implementation in the United States of the advance, approaches to

determining risk-based capital requirements for credit and

operational risk.

\5\ The credit conversation factors used in this proposed

rulemaking mirror in the agencies' July 2003 Advanced Notice of

Proposed Rulemaking for non-controlled early amortization of

uncommitted retail credit lines.

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The agencies believe that the risks associated with early

amortization exist for all banking organizations that utilize

securitizations of revolving exposures to fund their operations.

Further, the agencies acknowledge that while early amortization events

are infrequent, an increasing number of securitizations have been

forced to unwind and repay investors earlier than planned. Given these

concerns, the agencies are requesting comment on whether to impose a

more risk-sensitive approach for assessing capital against

securitizations of revolving retail credit exposures that incorporate

early amortization provisions, which would apply to all banking

organizations that use these vehicles to fund their operations.

Such an early amortization capital charge would be applied to

securitizations of revolving retail credit facilities that include

early amortization provisions, which are expected predominantly to be

credit card securitizations. Since risk-based capital already is held

against the on-balance sheet seller's interest, such a capital charge

would be assessed against only the off-balance sheet investors'

interest and only in the event that the excess spread in the

transaction has declined to a predetermined level. The proposed capital

requirement would assess increasing amounts of risk-based capital as

the level of excess spread approaches the early amortization trigger

(typically, a three-month average excess spread of zero). Therefore, as

the probability of an early amortization event increases, the capital

charge against the off-balance sheet portion of the securitization also

would increase.

At this time, the agencies are only requesting comment on whether

to assess risk-based capital against securitizations of revolving

retail credit exposures (defined to include personal and business

credit card accounts), even though there are some transactions that

securitize revolving corporate exposures, such as certain

collateralized loan obligations. The agencies are considering the

appropriateness of applying an early amortization capital charge to

securitizations of non-retail revolving credit exposures and request

comment on this issue.

The maximum risk-based capital requirement that would be assessed

under the proposal would be equal to the greater of (i) the capital

requirement for residual interests or (ii) the capital requirement that

would have applied if the securitized assets were held on the

securitizing banking organization's balance sheet. The latter capital

charge generally is 8 percent for credit card receivables. For example,

if a banking organization, after securitizing a credit card portfolio,

retains a combination of an interest-only strips receivable, a spread

account, and a subordinated tranche that equaled 12 percent of the

transaction, then under the agencies' risk-based capital standards the

organization would be assessed a dollar-for-dollar capital charge

against the 12 percent of retained, subordinated securitization

exposures, net of any associated deferred tax liabilities. In this

example, there would be no incremental charge for early amortization

risk. Alternatively, if the amount of the retained exposures were less

than 8 percent, which is the risk-based capital charge for credit card

receivables held on the balance sheet, then the charge against the

retained securitization exposures plus any early amortization capital

charge would be limited to 8 percent. Potentially, if the exposure were

limited by contract, the risk-based capital requirement could be

limited to that contractual amount under the low-level exposure rule.

In order to determine whether a banking organization securitizing

revolving retail credit facilities containing early amortization

provisions must hold risk-based capital against the off-balance sheet

portion of its securitization (that is, the investors' interest), the

three-month average excess spread must be compared against the

difference between (i) the point at which the securitization trust

would be required by the securitization documents to trap excess spread

(spread trapping point) in a spread or reserve account and (ii) the

excess spread level at which early amortization would be triggered.

This differential would be referred to as the excess spread

differential (ESD). If the securitization documents do not require

excess spread to be trapped, then for purposes of this calculation the

spread trapping point is deemed to be 450 basis points higher than the

early amortization trigger. If such a securitization does not employ

the concept of excess spread as a transaction's determining factor of

when an early amortization is triggered, then a 10 percent credit

conversion factor is applied to the outstanding principal

[[Page 56573]]

balance of the investors' interest at the securitization's inception,

regardless of the level of the transaction's excess spread. Once the

difference between the spread trapping point and the early amortization

trigger is determined, this difference must be divided into four equal

segments.

For example, if the spread trapping point is 4.5 percent and the

early amortization trigger is zero, then the 450 basis point difference

would be divided into four equal segments of 112.5 basis points. A

credit conversion factor of zero percent would be applied to the

outstanding principal balance of the off-balance sheet investors'

interest if a securitization's three-month average excess spread

equaled or exceeded the spread trapping point (4.5 percent in the

example). Credit conversion factors of 5 percent, 10 percent, 50

percent, and 100 percent are assigned to each segment in descending

order beginning at the spread trapping point as the securitization

approaches early amortization as follows:

Example of Credit Conversion Factor Assignment by Segment

In this example, if the three-month average excess spread is

greater than 450 or equal to basis points, the banking organization

would not incur a risk-based capital charge for early amortization.

However, once the three-month average excess spread declines below 450

basis points, a positive credit conversion factor would be applied

against the outstanding principal balance of the off-balance sheet

investors' interest to calculate the credit equivalent amount of assets

that is to be risk weighted according to the asset type, typically the

100 percent risk weight category.

On the other hand, if the spread trapping point instead were 6

percent and the early amortization trigger were 2 percent, then the ESD

would be 4 percent, resulting in four equal segments of 100 basis

points. The 5 percent credit conversion factor would be applied to the

off-balance sheet investors' interest when the three-month average

excess spread declined to between 6 percent and 5 percent.

The agencies seek comment on whether to adopt such a treatment of

securitization of revolving credit facilities containing early

amortization mechanisms. Would such a treatment satisfactorily address

the potential risks such transactions pose to originators? Are there

other approaches, treatments, or factors that the agencies should

consider? Comments also are invited on the interplay and timing between

this proposal and the proposed capital treatment for securitization

structures contained in the agencies' July 2003 advanced notice of

proposed rulemaking regarding the implementation of the proposed Basel

Capital Accord.

III. Elimination of Summary Sections of Rules Text

The agencies also are proposing to amend their risk-based capital

standards by deleting tables and attachments that summarize the risk

categories, credit conversion factors, and transitional arrangements.

These tables and attachments have become outdated and unnecessary

because the substance of these summaries is included in the main text

of the risk-based capital standards. Furthermore, these summary tables

and attachments were originally provided to assist banking

organizations unfamiliar with the new framework during the transition

period when the agencies' risk-based capital requirements were

initially implemented. Deleting the tables and attachments will remove

unnecessary regulatory text.

IV. Regulatory Analysis

Regulatory Flexibility Act Analysis

Pursuant to section 605(b) of the Regulatory Flexibility Act, the

Agencies have determined that this proposed rule would not have a

significant impact on a substantial number of small entities in

accordance with the spirit and purposes of the Regulatory Flexibility

Act (5 U.S.C. 601 et seq.). The agencies believe that this proposed

rule should not impact a substantial number of small banking

organizations because such organizations typically do not sponsor ABCP

programs, provide liquidity facilities to such programs, or engage in

securitizations of revolving retail credit facilities. Accordingly, a

regulatory flexibility analysis is not required.

Paperwork Reduction Act

The Agencies have determined that this proposed rule does not

involve a collection of information pursuant to the provisions of the

Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

Unfunded Mandates Reform Act of 1995

OCC: Section 202 of the Unfunded Mandates Reform Act of 1995, Pub.

L. 104-4 (Unfunded Mandates Act) requires that an agency prepare a

budgetary impact statement before promulgating a rule that includes a

Federal mandate that may result in expenditure by State, local, and

tribal governments, in the aggregate, or by the private sector, of $100

million or more in any one year. If a budgetary impact statement is

required, section 205 of the Unfunded Mandates Act also requires an

agency to identify and consider a reasonable number of regulatory

alternatives before promulgating a rule. The OCC believes that

exclusion of consolidated ABCP program assets from risk-weighted assets

for risk-based capital purposes will not result in a significant impact

for national banks because the exclusion of consolidated ABCP program

assets is designed to offset the effect of FIN 46 on risk-based

capital. With respect to the proposed capital treatment of liquidity

facilities, because national banks that provide liquidity facilities to

ABCP programs currently exceed regulatory minimum capital requirements,

the OCC does not believe these banks will be required to raise

additional capital. Finally, while the OCC and the other Federal

banking agencies do not currently collect data on the excess spread

levels for individual revolving securitizations, the OCC does not

believe that the proposed capital charge on revolving securitizations

will have a significant impact on the capital requirements of national

banks because currently, most revolving securitizations are operating

with excess spread levels above the proposed capital triggers.

OTS: Section 202 of the Unfunded Mandates Reform Act of 1995, Pub.

L. 104-4 (Unfunded Mandates Act) requires that an agency prepare a

budgetary impact statement before promulgating a rule that includes a

Federal mandate that may result in expenditure by State, local, and

tribal governments, in the aggregate, or by the private sector, of $100

million or more in any one year. If a budgetary impact statement is

required, section 205 of the Unfunded Mandates Act also requires an

agency to identify and consider a reasonable number of regulatory

alternatives before promulgating a rule.

Plain Language

Section 722 of the Gramm-Leach-Bliley (GLB) Act requires the

Federal banking agencies to use ``plain language'' in all proposed and

final rules published after January 1, 2000. In light of this

requirement, the agencies

[[Page 56574]]

have sought to present their proposed rules in a simple and

straightforward manner. The agencies invite comments on whether there

are additional steps the agencies could take to make the rules easier

to understand.

List of Subjects

12 CFR Part 3

Administrative practice and procedure, Capital, National banks,

Reporting and recordkeeping requirements, Risk.

12 CFR Part 208

Accounting, Agriculture, Banks, Banking, Confidential business

information, Crime, Currency, Federal Reserve System, Mortgages,

Reporting and recordkeeping requirements, Securities.

12 CFR Part 225

Administrative practice and procedure, Banks, Banking, Federal

Reserve System, Holding companies, Reporting and recordkeeping

requirements, Securities.

12 CFR Part 325

Administrative practice and procedure, Bank deposit insurance,

Banks, Banking, Capital adequacy, Reporting and recordkeeping

requirements, Savings associations, State non-member banks.

12 CFR Part 567

Capital, Reporting and recordkeeping requirements, Savings

associations.

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter 1

Authority and Issuance

For the reasons set out in the joint preamble, part 3 of chapter I

of title 12 of the Code of Federal Regulations is proposed to be

amended as follows:

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

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

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

note, 1835, 3907, and 3909.

2. Appendix A to part 3 is amended as follows:

A. In section 1, paragraphs (c)(3) and (c)(30) are republished.

B. In section 2, paragraph (a)(3) is revised.

C. In section 3, paragraphs (b)(2)(ii), (b)(3)(i), and (b)(4)(i)

are revised; and new paragraph (b)(3)(ii) is added.

D. In section 4:

i. Paragraphs (a)(5) through (a)(16) are redesignated as paragraphs

(a)(7) through (a)(18); newly redesignated paragraphs (a)(15) through

(a)(18) are redesignated as paragraphs (a)(16) through (a)(19); and new

paragraphs (a)(5), (a)(6) and (a)(15) are added.

ii. Paragraphs (j) and (k) are revised;

iii. New paragraphs (l) and (m) are added.

E. In section 5, Tables 1 through 4 are removed.

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

Section 1. Purpose, Applicability of Guidelines and Definitions

* * * * *

(c) * * *

(3) Asset-backed commercial paper program means a program that

issues commercial paper backed by assets or other exposures held in

a bankruptcy-remote, special-purpose entity.

* * * * *

(30) Sponsor means a bank that:

(i) Establishes an asset-backed commercial paper program;

(ii) Approves the sellers permitted to participate in an asset-

backed commercial paper program;

(iii) Approves the asset pools to be purchased by an asset-

backed commercial paper program; or

(iv) Administers the asset-backed commercial paper program by

monitoring the assets, arranging for debt placement, compiling

monthly reports, or ensuring compliance with the program documents

and with the program's credit and investment policy.

* * * * *

Section 2. Components of Capital

* * * * *

(a) * * *

(3) Minority interests in the equity accounts of consolidated

subsidiaries, except that the following are not included in Tier 1

capital or total capital:

(i) Minority interests in a small business investment company or

investment fund that holds nonfinancial equity investments and

minority interests in a subsidiary that is engaged in a nonfinancial

activities and is held under one of the legal authorities listed in

section 1(c)(21) of this appendix A.

(ii) Minority interests in consolidated asset-backed commercial

paper programs sponsored by a bank if the consolidated assets are

excluded from risk-weighted assets pursuant to section 4(j)(1) of

this appendix A.

* * * * *

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

Off-Balance Sheet Items

* * * * *

(b) * * *

(2) * * *

(ii) Unused portion of commitments, including home equity lines

of credit, and eligible liquidity facilities (as defined in

accordance with section 4(l)(2) of this appendix A) provided to

asset-backed commercial paper programs, in form or in substance,

with an original maturity exceeding one-year \17\; and

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

\17\ Participations in commitments are treated in accordance

with section 4 of this appendix A.

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

* * * * *

(3) * * * (i) Trade-related contingencies which are short-term

self-liquidating instruments used to finance the movement of goods

and are collateralized by the underlying shipment (an example is a

commercial letter of credit); and

(ii) Unused portion of eligible liquidity facilities (as defined

in accordance with section 4(l)(2) of this appendix A) provided to

an asset-backed commercial paper program, in form or in substance,

with an original maturity of one year or less.

(4) * * * (i) Unused portion of commitments, including liquidity

facilities not provided to asset-backed commercial paper programs,

with an original maturity of one year or less;

* * * * *

Section 4. Recourse, Direct Credit Substitutes and Positions in

Securitizations

* * * * *

(a) * * *

(5) Early amortization trigger means a contractual requirement

that, if triggered, would cause a securitization to begin repaying

investors prior to the originally scheduled payment dates.

(6) Excess spread generally means gross finance charge

collections and other income received by the trust or special

purpose entity minus certificate interest, servicing fees, charge-

offs, and other trust or special purpose entity expenses.

* * * * *

(15) Revolving retail credit means an exposure to an individual

or a business where the borrower is permitted to vary both the drawn

amount and the amount of repayment within an agreed limit under a

line of credit (such as personal or business credit card accounts).

* * * * *

(j) Asset-backed commercial paper programs subject to

consolidation. (1) A bank that qualifies as a primary beneficiary

and must consolidate an asset-backed commercial paper program as a

variable interest entity under generally accepted accounting

principles may exclude the consolidated asset-backed commercial

paper program assets from risk-weighted assets if the bank is the

sponsor of the consolidated asset-backed commercial paper program.

(2) If a bank excludes such consolidated asset-backed commercial

paper program assets from risk-weighted assets, the bank must assess

the appropriate risk-based capital charge against any risk exposures

of the bank arising in connection with such asset-backed commercial

paper program, including direct credit substitutes, recourse

obligations, residual interests, liquidity facilities, and loans, in

accordance with sections 3 and 4(b) of this appendix A.

[[Page 56575]]

(3) If a bank either elects not to exclude consolidated asset-

backed commercial paper program assets from its risk-weighted assets

in accordance with section 4(j)(1) of this appendix A, or is not

permitted to exclude consolidated asset-backed commercial paper

program assets, the bank must assess a risk-based capital charge

based on the appropriate risk weight of the consolidated asset-

backed commercial paper program assets in accordance with section

3(a) of this appendix A. In such case, direct credit substitutes and

recourse obligations (including residual interests), and loans that

sponsoring banks provide to such asset-backed commercial paper

programs are not subject to any capital charge under section 4 of

this appendix A.

(k) Other variable interest entities subject to consolidation.

If a bank is required to consolidate the assets of a variable

interest entity under generally accepted accounting principles, the

bank must assess a risk-based capital charge based on the

appropriate risk weight of the consolidated assets in accordance

with section 3(a) of this appendix A. In such case, direct credit

substitutes and recourse obligations (including residual interests),

and loans that sponsoring banks provide to such asset-backed

commercial paper programs are not subject to any capital charge

under section 4 of this appendix A.

(l) Liquidity facility provided to an asset-backed commercial

paper program. (1) Noneligible liquidity facilities treated as

recourse or direct credit substitute. Liquidity facilities extended

to asset-backed commercial paper programs that do not meet the

criteria for an eligible liquidity facility provided to an asset-

backed commercial paper program in accordance with section 4(l)(2)

of this appendix A must be treated as recourse or as a direct credit

substitute, and assessed the appropriate risk-based capital charge

in accordance to section 4 of this appendix A.

(2) Eligible liquidity facility. In order for a liquidity

facility provided to an asset-backed commercial paper program to be

eligible for either the 50 percent or 20 percent credit conversion

factors under section 3(b)(2) or 3(b)(3)(ii) of this appendix A, the

liquidity facility must satisfy the following criteria:

(i) At the time of draw, the liquidity facility must be subject

to a reasonable asset quality test that:

(A) Precludes funding of assets that are 60 days or more past

due or in default; and

(B) If the assets that a liquidity facility is required to fund

are externally rated securities (at the time they are transferred

into the program), the facility must be used to fund only securities

that are externally rated investment grade at the time of funding.

If the assets are not externally rated at the time they are

transferred into the program, then they are not subject to this

investment grade requirement.

(ii) The liquidity facility must provide that, prior to any

draws, the bank's funding obligation is reduced to cover only those

assets that satisfy the funding criteria under the asset quality

test of the liquidity facility.

(m) Early amortization. (1) Additional capital charge for

revolving retail securitization with early amortization trigger. A

bank that originates a securitization of revolving retail credits

that contains early amortization triggers must risk weight the off-

balance sheet portion of such a securitization (investors' interest)

by multiplying the outstanding principal amount of the investors'

interest by the appropriate credit conversion factor in accordance

with Table F in section 4(m)(3) of this appendix A, and then

assigning the resulting credit equivalent amount to the appropriate

risk weight category pursuant to section 3(a) of this appendix A. In

order to determine the appropriate credit conversion factor, the

bank must compare the most recent three-month average excess spread

level of the securitization to the excess spread ranges in Table F

of section 4(m)(3) of this appendix A, and apply the corresponding

credit conversion factor.

(2) Excess spread differential. Before the bank can apply Table

F in section 4(m)(3) of this appendix A, the bank must calculate the

upper and lower bounds for each excess spread range. To calculate

the upper and lower bounds, the bank must first determine the excess

spread differential of the securitization. The excess spread

differential is equal to the difference between the point at which

the bank is required by the securitization to divert and trap excess

spread (spread trapping point) in a spread or reserve account and

the excess spread level at which early amortization of the

securitization is triggered (early amortization trigger). If the

securitization does not require excess spread to be diverted to a

spread or reserve account at a certain excess spread level, the

spread differential is equal to 4.5 percentage points. If the

securitization does not use excess spread as an early amortization

trigger, then a 10 percent credit conversion factor is applied to

the outstanding principal balance of the investors' interest at the

securitization's inception.

(3) Excess spread differential segments. Once the excess spread

differential is determined, the standard excess spread differential

value must be calculated by dividing the excess spread differential

by 4. The upper and lower bounds for each of the excess spread

differential segments is calculated using the spread trapping point

and the standard excess spread differential value in accordance with

the formulas provided in Table F of section 4(m)(3) of this appendix

A. As provided in Table F of section 4(m)(3) of this appendix A, if

the three-month excess spread level equals or exceeds the spread

trapping point, the credit conversion factor is zero (resulting in

no capital charge on the investors' interest). If the spread

trapping point exceeds the three-month excess spread level, then the

corresponding credit conversion factor applied to the investors'

interest increases in steps from 5 percent to 100 percent as the

three-month excess spread level approaches the early amortization

trigger.

Table F.--Credit Conversion Factors for Revolving Retail Securitizations

with Early Amortization Triggers

(5) Limitations on risk-based capital requirements. For a bank

subject to the early amortization requirements in section 4(m) of

this appendix A, the total risk-based capital requirement for all of

the bank's exposures to a securitization of revolving retail credits

is limited to the greater of the risk-based capital requirement for

residual interests, as defined in accordance with section 4(a)(14)

of this appendix A, or the risk-based capital requirement for the

underlying securitized assets calculated as if the bank continued to

hold the assets on its balance sheet.

* * * * *

3. Appendix B to part 3 is amended by adding a new sentence at the

end of

[[Page 56576]]

section 2, paragraph (a) to read as follows:

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

Adjustment

* * * * *

Section 2. Definitions

* * * * *

(a) * * * Liquidity facilities provided to asset-backed

commercial paper programs in a bank's trading account are excluded

from covered positions, and instead, are subject to the risk-based

capital requirements as provided in appendix A of this part.

Dated: September 4, 2003.

John D. Hawke,

Comptroller of the Currency.

FEDERAL RESERVE SYSTEM

12 CFR Chapter II

Authority and Issuance

For the reasons set forth in the joint preamble, the Board of

Governors of the Federal Reserve System proposes to amend parts 208 and

225 of chapter II of title 12 of the Code of Federal Regulations as

follows:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL

RESERVE SYSTEM (REGULATION H)

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

follows:

Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a,

371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 1823(j),

1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x, 1835a, 1882,

2901-2907, 3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b,

78l(b), 78l(g), 78l(i), 78o-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C.

5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.

2. In Appendix A to part 208, the following amendments are

proposed:

a. Section II.A.1.c. is revised.

b. In section III.B.3--

i. Paragraph a., Definitions, is revised.

ii. Paragraph g., Limitations on risk-based capital requirements,

is redesignated as paragraph h.

iii. A new paragraph g., Early amortization triggers, is added.

iv. A new paragraph iv., is added to the redesignated paragraph h.

c. Section III.B.6. is revised.

d. In section III.D--

i. The last sentence of the introductory paragraph is removed.

ii. In paragraph 2., Items with a 50 percent conversion factor, the

third undesignated paragraph is revised, the fourth undesignated

paragraph is removed, and the five remaining undesignated paragraphs

are designated as 2.a. through 2.c.

iii. In paragraph 3, Items with a 20 percent conversion factor, the

first undesignated paragraph is designated as 3.a. and a new paragraph

3.b. is added.

iv. The first sentence in paragraph 4., Items with a zero percent

conversion factor, is revised.

v. Footnote 54 is removed and reserved.

e. Attachments IV, V, and VI are removed.

Appendix A to Part 208--Capital Adequacy Guidelines for State Member

Banks: Risk-Based Measure

* * * * *

II. * * *

A. * * *

1. * * *

c. Minority interest in equity accounts of consolidated

subsidiaries. This element is included in Tier 1 because, as a

general rule, it represents equity that is freely available to

absorb losses in operating subsidiaries whose assets are included in

a bank's risk-weighted asset base. While not subject to an explicit

sublimit within Tier 1, banks are expected to avoid using minority

interest in the equity accounts of consolidated subsidiaries as an

avenue for introducing into their capital structures elements that

might not otherwise qualify as Tier 1 capital or that would, in

effect, result in an excessive reliance on preferred stock within

Tier 1. Minority interests in small business investment companies,

investment funds that hold nonfinancial equity investments (as

defined in section II.B.5.b. of this appendix A), and subsidiaries

engaged in nonfinancial activities, are not included in the bank's

Tier 1 or total capital base if the bank's interest in the company

or fund is held under one of the legal authorities listed in section

II.B.5.b. In addition, minority interests in consolidated asset-

backed commercial paper programs (as defined in section III.B.6. of

this appendix) that are sponsored by a bank are not to be included

in the bank's Tier 1 or total capital base when the bank excludes

the consolidated assets of such programs from risk-weighted assets

pursuant to section III.B.6. of this appendix.

* * * * *

III. * * *

B. * * *

a. Definitions--i. Credit derivative means a contract that

allows one party (the ``protection purchaser'') to transfer the

credit risk of an asset or off-balance sheet credit exposure to

another party (the ``protection provider''). The value of a credit

derivative is dependent, at least in part, on the credit performance

of the ``reference asset.''

ii. Credit-enhancing representations and warranties means

representations and warranties that are made or assumed in

connection with a transfer of assets (including loan servicing

assets) and that obligate the bank to protect investors from losses

arising from credit risk in the assets transferred or the loans

serviced. Credit-enhancing representations and warranties include

promises to protect a party from losses resulting from the default

or nonperformance of another party or from an insufficiency in the

value of the collateral. Credit-enhancing representations and

warranties do not include:

1. Early default clauses and similar warranties that permit the

return of, or premium refund clauses covering, 1-4 family

residential first mortgage loans that qualify for a 50 percent risk

weight for a period not to exceed 120 days from the date of

transfer. These warranties may cover only those loans that were

originated within 1 year of the date of transfer;

2. Premium refund clauses that cover assets guaranteed, in whole

or in part, by the U.S. Government, a U.S. Government agency or a

government-sponsored enterprise, provided the premium refund clauses

are for a period not to exceed 120 days from the date of transfer;

or

3. Warranties that permit the return of assets in instances of

misrepresentation, fraud or incomplete documentation.

iii. Direct credit substitute means an arrangement in which a

bank assumes, in form or in substance, credit risk associated with

an on- or off-balance sheet credit exposure that was not previously

owned by the bank (third-party asset) and the risk assumed by the

bank exceeds the pro rata share of the bank's interest in the third-

party asset. If the bank has no claim on the third-party asset, then

the bank's assumption of any credit risk with respect to the third

party asset is a direct credit substitute. Direct credit substitutes

include, but are not limited to:

1. Financial standby letters of credit that support financial

claims on a third party that exceed a bank's pro rata share of

losses in the financial claim;

2. Guarantees, surety arrangements, credit derivatives, and

similar instruments backing financial claims that exceed a bank's

pro rata share in the financial claim;

3. Purchased subordinated interests or securities that absorb

more than their pro rata share of losses from the underlying assets;

4. Credit derivative contracts under which the bank assumes more

than its pro rata share of credit risk on a third party exposure;

5. Loans or lines of credit that provide credit enhancement for

the financial obligations of an account party;

6. Purchased loan servicing assets if the servicer is

responsible for credit losses or if the servicer makes or assumes

credit-enhancing representations and warranties with respect to the

loans serviced. Mortgage servicer cash advances that meet the

conditions of section III.B.3.a.viii. of this appendix are not

direct credit substitutes; and

7. Clean-up calls on third party assets. Clean-up calls that are

10 percent or less of the original pool balance that are exercisable

at the option of the bank are not direct credit substitutes.

8. Liquidity facilities extended to ABCP programs that are not

eligible liquidity facilities (as defined in section III.B.3.a. of

this appendix).

iv. Early amortization triggers mean contractual requirements

that, if triggered, would cause a securitization to begin repaying

investors prior to the originally scheduled payment dates.

v. Eligible liquidity facility means a facility subject to a

reasonable asset quality test at

[[Page 56577]]

the time of draw that precludes funding against assets that are 60

days or more past due or in default. In addition, if the assets that

an eligible liquidity facility is required to fund against are

externally rated exposures at the inception of the facility, the

facility can be used to fund only exposures that are externally

rated investment grade at the time of funding. Furthermore, an

eligible liquidity facility must contain provisions that, prior to

any draws, reduces the bank's funding obligation to cover only those

assets that would meet the funding criteria under the facility's

asset quality tests.

vi. Excess Spread means gross finance charge collections and

other income received by the trust or special purpose entity (SPE)

minus certificate interest, servicing fees, charge-offs, and other

trust or SPE expenses.

vii. Externally rated means that an instrument or obligation has

received a credit rating from a nationally-recognized statistical

rating organization.

viii. Face amount means the notional principal, or face value,

amount of an off-balance sheet item; the amortized cost of an asset

not held for trading purposes; and the fair value of a trading

asset.

ix. Financial asset means cash or other monetary instrument,

evidence of debt, evidence of an ownership interest in an entity, or

a contract that conveys a right to receive or exchange cash or

another financial instrument from another party.

x. Financial standby letter of credit means a letter of credit

or similar arrangement that represents an irrevocable obligation to

a third-party beneficiary:

1. To repay money borrowed by, or advanced to, or for the

account of, a second party (the account party), or

2. To make payment on behalf of the account party, in the event

that the account party fails to fulfill its obligation to the

beneficiary.

xi. Mortgage servicer cash advance means funds that a

residential mortgage loan servicer advances to ensure an

uninterrupted flow of payments, including advances made to cover

foreclosure costs or other expenses to facilitate the timely

collection of the loan. A mortgage servicer cash advance is not a

recourse obligation or a direct credit substitute if:

1. The servicer is entitled to full reimbursement and this right

is not subordinated to other claims on the cash flows from the

underlying asset pool; or

2. For any one loan, the servicer's obligation to make

nonreimbursable advances is contractually limited to an

insignificant amount of the outstanding principal balance of that

loan.

xii. Nationally recognized statistical rating organization

(NRSRO) means an entity recognized by the Division of Market

Regulation of the Securities and Exchange Commission (or any

successor Division) (Commission) as a nationally recognized

statistical rating organization for various purposes, including the

Commission's uniform net capital requirements for brokers and

dealers.

xiii. Recourse means the retention, by a bank, in form or in

substance, of any credit risk directly or indirectly associated with

an asset it has transferred and sold that exceeds a pro rata share

of the bank's claim on the asset. If a bank has no claim on a

transferred asset, then the retention of any risk of credit loss is

recourse. A recourse obligation typically arises when a bank

transfers assets and retains an explicit obligation to repurchase

the assets or absorb losses due to a default on the payment of

principal or interest or any other deficiency in the performance of

the underlying obligor or some other party. Recourse may also exist

implicitly if a bank provides credit enhancement beyond any

contractual obligation to support assets it has sold. The following

are examples of recourse arrangements:

1. Credit-enhancing representations and warranties made on the

transferred assets;

2. Loan servicing assets retained pursuant to an agreement under

which the bank will be responsible for credit losses associated with

the loans being serviced. Mortgage servicer cash advances that meet

the conditions of section III.B.3.a.viii. of this appendix are not

recourse arrangements;

3. Retained subordinated interests that absorb more than their

pro rata share of losses from the underlying assets;

4. Assets sold under an agreement to repurchase, if the assets

are not already included on the balance sheet;

5. Loan strips sold without contractual recourse where the

maturity of the transferred loan is shorter than the maturity of the

commitment under which the loan is drawn;

6. Credit derivatives issued that absorb more than the bank's

pro rata share of losses from the transferred assets; and

7. Clean-up calls at inception that are greater than 10 percent

of the balance of the original pool of transferred loans. Clean-up

calls that are 10 percent or less of the original pool balance that

are exercisable at the option of the bank are not recourse

arrangements.

8. Liquidity facilities extended to ABCP programs that are not

eligible liquidity facilities (as defined in section III.B.3.a. of

this appendix).

xiv. Residual interest means any on-balance sheet asset that

represents an interest (including a beneficial interest) created by

a transfer that qualifies as a sale (in accordance with generally

accepted accounting principles) of financial assets, whether through

a securitization or otherwise, and that exposes the bank to credit

risk directly or indirectly associated with the transferred assets

that exceeds a pro rata share of the bank's claim on the assets,

whether through subordination provisions or other credit enhancement

techniques. Residual interests generally include credit-enhancing I/

Os, spread accounts, cash collateral accounts, retained subordinated

interests, other forms of over-collateralization, and similar assets

that function as a credit enhancement. Residual interests further

include those exposures that, in substance, cause the bank to retain

the credit risk of an asset or exposure that had qualified as a

residual interest before it was sold. Residual interests generally

do not include interests purchased from a third party, except that

purchased credit-enhancing I/Os are residual interests for purposes

of this appendix.

xv. Revolving retail credit facility means an exposure to an

individual where the borrower is permitted to vary both the drawn

amount and the amount of repayment within an agreed limit under a

line of credit (such as credit card accounts). Revolving retail

credits include business credit card accounts.

xvi. Risk participation means a participation in which the

originating party remains liable to the beneficiary for the full

amount of an obligation (e.g., a direct credit substitute)

notwithstanding that another party has acquired a participation in

that obligation.

xvii. Securitization means the pooling and repackaging by a

special purpose entity of assets or other credit exposures into

securities that can be sold to investors. Securitization includes

transactions that create stratified credit risk positions whose

performance is dependent upon an underlying pool of credit

exposures, including loans and commitments.

xviii. Sponsor means a bank that establishes an asset-backed

commercial paper program; approves the sellers permitted to

participate in the program; approves the asset pools to be purchased

by the program; or administers the asset-backed commercial paper

program by monitoring the assets, arranging for debt placement,

compiling monthly reports, or ensuring compliance with the program

documents and with the program's credit and investment policy.

xix. Structured finance program means a program where receivable

interests and asset-backed securities issued by multiple

participants are purchased by a special purpose entity that

repackages those exposures into securities that can be sold to

investors. Structured finance programs allocate credit risks,

generally, between the participants and credit enhancement provided

to the program.

xx. Traded position means a position that is externally rated

and is retained, assumed, or issued in connection with an asset

securitization, where there is a reasonable expectation that, in the

near future, the rating will be relied upon by unaffiliated

investors to purchase the position; or an unaffiliated third party

to enter into a transaction involving the position, such as a

purchase, loan, or repurchase agreement.

* * * * *

g. Early Amortization Triggers. i. A bank that originates

securitizations of revolving retail credit facilities that contain

early amortization triggers must incorporate the off-balance sheet

portion of such a securitization (that is, the investors' interest)

into the bank's risk-weighted assets by multiplying the outstanding

principal amount of the investors' interest by the appropriate

credit conversion factor and then assigning the resultant credit

equivalent amount to the appropriate risk weight category. The

credit conversion factor to be applied to such a securitization

generally is a function of the securitization's most recent three-

month average excess spread level, the point at which excess spread

in the securitization must be trapped in a spread or reserve

account, and the excess spread level

[[Page 56578]]

at which an early amortization of the securitization is triggered.

ii. In order to determine the appropriate credit conversion

factor to be applied to the outstanding principal balance of the

investors' interest, the originating bank must compare the

securitization's most recent three-month average excess spread level

against the difference between the point at which the bank is

required by the securitization documents to divert and trap excess

spread (spread trapping point) in a spread or reserve account and

the excess spread level at which early amortization of the

securitization is triggered (early amortization trigger). The

difference between the spread trapping point and the early

amortization trigger is referred to as the excess spread

differential (ESD). In a securitization of revolving retail credit

facilities that employs the concept of excess spread to determine

when an early amortization is triggered but where the

securitization's transaction documents do not require excess spread

to be diverted to a spread or reserve account at a certain level,

the ESD is deemed to be 4.5 percentage points.

iii. If a securitization of revolving retail credit facilities

does not employ the concept of excess spread as the transaction's

determining factor of when an early amortization is triggered, then

a 10 percent credit conversion factor is applied to the outstanding

principal balance of the investors' interest at the securitization's

inception.

iv. The ESD must then be divided to create four equal ESD

segments. For example, when the ESD is 4.5 percent, this amount is

divided into 4 equal ESD segments of 112.5 basis points. A credit

conversion factor of zero percent would be applied to the

outstanding principal balance of the investors' interest if the

securitization's three-month average excess spread equaled or

exceeded the securitization's spread trapping point (4.5 percent in

the example). Credit conversion factors of 5 percent, 10 percent, 50

percent, and 100 percent are then assigned to each of the four equal

ESD segments in descending order beginning at the spread trapping

point as the securitization approaches early amortization. For

instance, when the ESD is 4.5 percent, the credit conversion factors

would be applied to the outstanding balance of the investors'

interest as follows:

Example of Credit Conversion Factor Assignment by Segment of Excess

Spread Differential

h. Limitations on risk-based capital requirements. * * *

iv. For a bank subject to the early amortization treatment in

section III.B.3.g. of this appendix, the total risk-based capital

requirement for all of the bank's exposures to a securitization of

revolving retail credit facilities is limited to the greater of the

risk-based capital requirement for residual interests, as defined in

section III.B.3.a. of this appendix, or the risk-based capital

requirement for the underlying securitized assets calculated as if

the bank continued to hold the assets on its balance sheet.

* * * * *

6. Asset-backed commercial paper programs. a. An asset-backed

commercial paper (ABCP) program typically is a program through which

a bank provides funding to its corporate customers by sponsoring and

administering a bankruptcy-remote special purpose entity that

purchases asset pools from, or extends loans to, the bank's

customers. The ABCP program raises the cash to provide the funding

through the issuance of commercial paper in the market.

b. A bank that qualifies as a primary beneficiary and must

consolidate an ABCP program that is defined as a variable interest

entity under GAAP may exclude the consolidated ABCP program assets

from risk-weighted assets provided that the bank is the sponsor of

the consolidated ABCP program. If a bank excludes such consolidated

ABCP program assets, the bank must assess the appropriate risk-based

capital charge against any risk exposures of the bank arising in

connection with such ABCP programs, including direct credit

substitutes, recourse obligations, residual interests, liquidity

facilities, and loans, in accordance with sections III.B.3, III.C.

and III.D. of this appendix.

* * * * *

III. * * *

D. * * *

2. Items with a 50 percent conversion factor. * * *

c. Commitments are defined as any legally binding arrangements

that obligate a bank to extend credit in the form of loans or

leases; to purchase loans, securities, or other assets; or to

participate in loans and leases. They also include overdraft

facilities, revolving credit, home equity and mortgage lines of

credit, eligible liquidity facilities to asset-backed commercial

paper programs-,(in form or in substance), and similar transactions.

Normally, commitments involve a written contract or agreement and a

commitment fee, or some other form of consideration. Commitments are

included in weighted-risk assets regardless of whether they contain

``material adverse change'' clauses or other provisions that are

intended to relieve the issuer of its funding obligation under

certain conditions. In the case of commitments structured as

syndications, where the bank is obligated solely for its pro rata

share, only the bank's proportional share of the syndicated

commitment is taken into account in calculating the risk-based

capital ratio. Banks that are subject to the market risk rules are

required to convert the notional amount of long-term covered

positions carried in the trading account that act as eligible

liquidity facilities to ABCP programs, in form or in substance, at

50 percent to determine the appropriate credit equivalent amount for

those facilities even though they are structured or characterized as

derivatives or other trading book assets.

* * * * *

3. Items with a 20 percent conversion factor. * * *

a. * * *

b. Undrawn portions of eligible liquidity facilities with an

original maturity of one year or less that banks provide to asset-

backed commercial paper (ABCP) programs also are converted at 20

percent. The resulting credit equivalent amount is then assigned to

the risk category appropriate to the underlying assets or the

obligor, after consideration of any collateral or guarantees, or

external credit ratings, if applicable. Banks that comply with the

market risk rules are required to convert the notional amount of

short-term covered positions carried in the trading account that act

as liquidity facilities to ABCP programs, in form or in substance,

at 20 percent to determine the appropriate credit equivalent amount

for those facilities even though they are structured or

characterized as derivatives or other trading book assets. Liquidity

facilities extended to ABCP programs that do not meet the following

criteria are to be considered recourse obligations or direct credit

substitutes and assessed the appropriate risk-based capital

requirement in accordance with section III.B.3. of this appendix.

Eligible liquidity facilities must be subject to a reasonable asset

quality test at the time of draw that precludes funding against

assets in the ABCP program that are 60 days or more past due or in

default. In addition, if the assets that eligible liquidity

facilities are required to fund against are externally rated

exposures, the facility can be used to fund only those exposures

that are externally rated investment grade at the time of funding.

Furthermore, liquidity facilities should contain provisions that,

prior to any draws, reduces the bank's funding obligation to cover

only those assets that would meet the funding criteria under the

facilities' asset quality tests.

4. * * * These include unused portions of commitments, with the

exception of eligible liquidity facilities provided to ABCP

programs, with an original maturity of one year or less,\54\ or

which are unconditionally cancelable at any time, provided a

separate credit decision is made before each drawing under the

facility. * * *

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

\54\ [Reserved]

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

* * * * *

3. Amend appendix E to part 208 by adding two new sentences at the

end of section 2.(a). to read as follows:

Appendix E to Part 208--Capital Adequacy Guidelines for State Member

Banks; Market Risk Measure

* * * * *

Section 2. Definitions * * *

(a) *** Covered positions exclude all positions in a bank's

trading account that, in form or in substance, act as eligible

liquidity facilities (as defined in section III.B.3.a. of

[[Page 56579]]

appendix A of this part) to asset-backed commercial paper programs

(as defined in section III.B.6. of appendix A of this part). Such

excluded positions are subject to the risk-based capital

requirements set forth in appendix A of this part.

* * * * *

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL

(REGULATION Y)

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

follows:

Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,

1843( c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907,

and 3909; 15 U.S.C. 6801 and 6805.

2. In Appendix A to part 225, the following amendments are

proposed:

a. Section II.A.1.c. is revised.

b. In section III.B.3--

i. Paragraph a., Definitions, is revised.

ii. Paragraph g., Limitations on risk-based capital requirements,

is redesignated as paragraph h.

iii. A new paragraph g., Early amortization triggers, is added.

iv. A new paragraph iv., is added to the redesignated paragraph h.

c. Section III.B.6. is revised.

d. In section III.D--

i. The last sentence of the introductory paragraph is removed.

ii. In paragraph 2., Items with a 50 percent conversion factor, the

third undesignated paragraph is revised, the fourth undesignated

paragraph is removed, and the five remaining undesignated paragraphs

are designated as 2.a. through 2.e

iii. In paragraph 3, Items with a 20 percent conversion factor, the

first undesignated paragraph is designated as 3.a. and a new paragraph

3.b. is added.

iv. The first sentence in the paragraph 4., Items with a zero

percent conversion factor, is revised.

d. Attachments IV, V, and VI are removed.

Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding

Companies: Risk-Based Measure

* * * * *

II. * * *

A. * * *

1. * * *

c. Minority interest in equity accounts of consolidated

subsidiaries. This element is included in Tier 1 because, as a

general rule, it represents equity that is freely available to

absorb losses in operating subsidiaries whose assets are included in

a bank organization's risk-weighted asset base. While not subject to

an explicit sublimit within Tier 1, banking organizations are

expected to avoid using minority interest in the equity accounts of

consolidated subsidiaries as an avenue for introducing into their

capital structures elements that might not otherwise qualify as Tier

1 capital or that would, in effect, result in an excessive reliance

on preferred stock within Tier 1. Minority interests in small

business investment companies, investment funds that hold

nonfinancial equity investments (as defined in section II.B.5.b. of

this appendix A), and subsidiaries engaged in nonfinancial

activities are not included in the banking organization's Tier 1 or

total capital base if the organization's interest in the company or

fund is held under one of the legal authorities listed in section

II.B.5.b. In addition, minority interests in consolidated asset-

backed commercial paper programs (as defined in section III.B.6. of

this appendix) that are sponsored by a banking organization are not

to be included in the organization's Tier 1 or total capital base if

the bank holding company excludes the consolidated assets of such

programs from risk-weighted assets pursuant to section III.B.6. of

this appendix.

* * * * *

III. * * *

B. * * *

a. Definitions--i. Credit derivative means a contract that

allows one party (the ``protection purchaser'') to transfer the

credit risk of an asset or off-balance sheet credit exposure to

another party (the ``protection provider''). The value of a credit

derivative is dependent, at least in part, on the credit performance

of the ``reference asset.''

ii. Credit-enhancing representations and warranties means

representations and warranties that are made or assumed in

connection with a transfer of assets (including loan servicing

assets) and that obligate the bank holding company to protect

investors from losses arising from credit risk in the assets

transferred or the loans serviced. Credit-enhancing representations

and warranties include promises to protect a party from losses

resulting from the default or nonperformance of another party or

from an insufficiency in the value of the collateral. Credit-

enhancing representations and warranties do not include:

1. Early default clauses and similar warranties that permit the

return of, or premium refund clauses covering, 1-4 family

residential first mortgage loans that qualify for a 50 percent risk

weight for a period not to exceed 120 days from the date of

transfer. These warranties may cover only those loans that were

originated within 1 year of the date of transfer;

2. Premium refund clauses that cover assets guaranteed, in whole

or in part, by the U.S. Government, a U.S. Government agency or a

government-sponsored enterprise, provided the premium refund clauses

are for a period not to exceed 120 days from the date of transfer;

or

3. Warranties that permit the return of assets in instances of

misrepresentation, fraud or incomplete documentation.

iii. Direct credit substitute means an arrangement in which a

bank holding company assumes, in form or in substance, credit risk

associated with an on- or off-balance sheet credit exposure that was

not previously owned by the bank holding company (third-party asset)

and the risk assumed by the bank holding company exceeds the pro

rata share of the bank holding company's interest in the third-party

asset. If the bank holding company has no claim on the third-party

asset, then the bank holding company's assumption of any credit risk

with respect to the third party asset is a direct credit substitute.

Direct credit substitutes include, but are not limited to:

1. Financial standby letters of credit that support financial

claims on a third party that exceed a bank holding company's pro

rata share of losses in the financial claim;

2. Guarantees, surety arrangements, credit derivatives, and

similar instruments backing financial claims that exceed a bank

holding company's pro rata share in the financial claim;

3. Purchased subordinated interests or securities that absorb

more than their pro rata share of losses from the underlying assets;

4. Credit derivative contracts under which the bank holding

company assumes more than its pro rata share of credit risk on a

third party exposure;

5. Loans or lines of credit that provide credit enhancement for

the financial obligations of an account party;

6. Purchased loan servicing assets if the servicer is

responsible for credit losses or if the servicer makes or assumes

credit-enhancing representations and warranties with respect to the

loans serviced. Mortgage servicer cash advances that meet the

conditions of section III.B.3.a.viii. of this appendix are not

direct credit substitutes; and

7. Clean-up calls on third party assets. Clean-up calls that are

10 percent or less of the original pool balance that are exercisable

at the option of the bank holding company are not direct credit

substitutes.

8. Liquidity facilities extended to ABCP programs that are not

eligible liquidity facilities (as defined in section III.B.3.a. of

this appendix).

iv. Early Amortization Triggers mean contractual requirements

that, if triggered, would cause a securitization to begin repaying

investors prior to the originally scheduled payment dates.

v. Eligible liquidity facility means a facility subject to a

reasonable asset quality test at the time of draw that precludes

funding against assets that are 60 days or more past due or in

default. In addition, if the assets that an eligible liquidity

facility is required to fund against are externally rated exposures

at the inception of the facility, the facility can be used to fund

only those exposures that are externally rated investment grade at

the time of funding. Furthermore, an eligible liquidity facility

must contain provisions that, prior to any draws, reduces the bank

holding company's funding obligation to cover only those assets that

would meet the funding criteria under the facility's asset quality

tests.

vi. Excess Spread means gross finance charge collections and

other income received by the trust or special purpose entity (SPE)

minus certificate interest, servicing fees, charge-offs, and other

trust or SPE expenses.

vii. Externally rated means that an instrument or obligation has

received a credit rating from a nationally-recognized statistical

rating organization.

viii. Face amount means the notional principal, or face value,

amount of an off-balance sheet item; the amortized cost of an

[[Page 56580]]

asset not held for trading purposes; and the fair value of a trading

asset.

ix. Financial asset means cash or other monetary instrument,

evidence of debt, evidence of an ownership interest in an entity, or

a contract that conveys a right to receive or exchange cash or

another financial instrument from another party.

x. Financial standby letter of credit means a letter of credit

or similar arrangement that represents an irrevocable obligation to

a third-party beneficiary:

1. To repay money borrowed by, or advanced to, or for the

account of, a second party (the account party), or

2. To make payment on behalf of the account party, in the event

that the account party fails to fulfill its obligation to the

beneficiary.

xi. Mortgage servicer cash advance means funds that a

residential mortgage loan servicer advances to ensure an

uninterrupted flow of payments, including advances made to cover

foreclosure costs or other expenses to facilitate the timely

collection of the loan. A mortgage servicer cash advance is not a

recourse obligation or a direct credit substitute if:

1. The servicer is entitled to full reimbursement and this right

is not subordinated to other claims on the cash flows from the

underlying asset pool; or

2. For any one loan, the servicer's obligation to make

nonreimbursable advances is contractually limited to an

insignificant amount of the outstanding principal balance of that

loan.

xii. Nationally recognized statistical rating organization

(NRSRO) means an entity recognized by the Division of Market

Regulation of the Securities and Exchange Commission (or any

successor Division) (Commission) as a nationally recognized

statistical rating organization for various purposes, including the

Commission's uniform net capital requirements for brokers and

dealers.

xiii. Recourse means the retention, by a bank holding company,

in form or in substance, of any credit risk directly or indirectly

associated with an asset it has transferred and sold that exceeds a

pro rata share of the banking organization's claim on the asset. If

a banking organization has no claim on a transferred asset, then the

retention of any risk of credit loss is recourse. A recourse

obligation typically arises when a bank holding company transfers

assets and retains an explicit obligation to repurchase the assets

or absorb losses due to a default on the payment of principal or

interest or any other deficiency in the performance of the

underlying obligor or some other party. Recourse may also exist

implicitly if a bank holding company provides credit enhancement

beyond any contractual obligation to support assets it has sold. The

following are examples of recourse arrangements:

1. Credit-enhancing representations and warranties made on the

transferred assets;

2. Loan servicing assets retained pursuant to an agreement under

which the bank holding company will be responsible for credit losses

associated with the loans being serviced. Mortgage servicer cash

advances that meet the conditions of section III.B.3.a.viii. of this

appendix are not recourse arrangements;

3. Retained subordinated interests that absorb more than their

pro rata share of losses from the underlying assets;

4. Assets sold under an agreement to repurchase, if the assets

are not already included on the balance sheet;

5. Loan strips sold without contractual recourse where the

maturity of the transferred loan is shorter than the maturity of the

commitment under which the loan is drawn;

6. Credit derivatives issued that absorb more than the bank

holding company's pro rata share of losses from the transferred

assets; and

7. Clean-up calls at inception that are greater than 10 percent

of the balance of the original pool of transferred loans. Clean-up

calls that are 10 percent or less of the original pool balance that

are exercisable at the option of the bank are not recourse

arrangements.

8. Liquidity facilities extended to ABCP programs that are not

eligible liquidity facilities (as defined in section III.B.3.a. of

this appendix).

xiv. Residual interest means any on-balance sheet asset that

represents an interest (including a beneficial interest) created by

a transfer that qualifies as a sale (in accordance with generally

accepted accounting principles) of financial assets, whether through

a securitization or otherwise, and that exposes the bank holding

company to credit risk directly or indirectly associated with the

transferred assets that exceeds a pro rata share of the bank holding

company's claim on the assets, whether through subordination

provisions or other credit enhancement techniques. Residual

interests generally include credit-enhancing I/Os, spread accounts,

cash collateral accounts, retained subordinated interests, other

forms of over-collateralization, and similar assets that function as

a credit enhancement. Residual interests further include those

exposures that, in substance, cause the bank holding company to

retain the credit risk of an asset or exposure that had qualified as

a residual interest before it was sold. Residual interests generally

do not include interests purchased from a third party, except that

purchased credit-enhancing I/Os are residual interests for purposes

of this appendix.

xv. Revolving retail credit facility means an exposure to an

individual where the borrower is permitted to vary both the drawn

amount and the amount of repayment within an agreed limit under a

line of credit (such as credit card accounts). Revolving retail

credits include business credit card accounts.

xvi. Risk participation means a participation in which the

originating party remains liable to the beneficiary for the full

amount of an obligation (e.g., a direct credit substitute)

notwithstanding that another party has acquired a participation in

that obligation.

xvii. Securitization means the pooling and repackaging by a

special purpose entity of assets or other credit exposures into

securities that can be sold to investors. Securitization includes

transactions that create stratified credit risk positions whose

performance is dependent upon an underlying pool of credit

exposures, including loans and commitments.

xviii. Sponsor means a bank holding company that establishes an

asset-backed commercial paper program; approves the sellers

permitted to participate in the program; approves the asset pools to

be purchased by the program; or administers the asset-backed

commercial paper program by monitoring the assets, arranging for

debt placement, compiling monthly reports, or ensuring compliance

with the program documents and with the program's credit and

investment policy.

xix. Structured finance program means a program where receivable

interests and asset-backed securities issued by multiple

participants are purchased by a special purpose entity that

repackages those exposures into securities that can be sold to

investors. Structured finance programs allocate credit risks,

generally, between the participants and credit enhancement provided

to the program.

xx. Traded position means a position that is externally rated

and is retained, assumed, or issued in connection with an asset

securitization, where there is a reasonable expectation that, in the

near future, the rating will be relied upon by unaffiliated

investors to purchase the position; or an unaffiliated third party

to enter into a transaction involving the position, such as a

purchase, loan, or repurchase agreement.

* * * * *

g. Early Amortization Triggers. i. A bank holding company that

originates securitizations of revolving retail credit facilities

that contain early amortization triggers must incorporate the off-

balance sheet portion of such a securitization (that is, the

investors' interest) into the bank's risk-weighted assets by

multiplying the outstanding principal amount of the investors'

interest by the appropriate credit conversion factor and then

assigning the resultant credit equivalent amount to the appropriate

risk weight category. The credit conversion factor to be applied to

such a securitization generally is a function of the

securitization's most recent three-month average excess spread

level, the point at which excess spread in the securitization must

be trapped in a spread or reserve account, and the excess spread

level at which an early amortization of the securitization is

triggered.

ii. In order to determine the appropriate credit conversion

factor to be applied to the outstanding principal balance of the

investors' interest, the originating bank holding company must

compare the securitization's most recent three-month average excess

spread level against the difference between the point at which the

organization is required by the securitization documents to divert

and trap excess spread (spread trapping point) in a spread or

reserve account and the excess spread level at which early

amortization of the securitization is triggered (early amortization

trigger). The difference between the spread trapping point and the

early amortization trigger is referred to as the excess spread

differential (ESD). In

[[Page 56581]]

a securitization of revolving retail credit facilities that employs

the concept of excess spread to determine when an early amortization

is triggered but where the securitization's transaction documents do

not require excess spread to be diverted to a spread or reserve

account at a certain level, the ESD is deemed to be 4.5 percentage

points.

iii. If a securitization of revolving retail credit facilities

does not employ the concept of excess spread as the transaction's

determining factor of when an early amortization is triggered, then

a 10 percent credit conversion factor is applied to the outstanding

principal balance of the investors' interest at the securitization's

inception.

iv. The ESD must then be divided to create four equal ESD

segments. For example, when the ESD is 4.5 percent, this amount is

divided into 4 equal ESD segments of 112.5 basis points. A credit

conversion factor of zero percent would be applied to the

outstanding principal balance of the investors' interest if the

securitization's three-month average excess spread equaled or

exceeded the securitization's spread trapping point (4.5 percent in

the example). Credit conversion factors of 5 percent, 10 percent, 50

percent, and 100 percent are then assigned to each of the four equal

ESD segments in descending order beginning with the spread trapping

point as the securitization approaches early amortization. For

instance, when the ESD is 4.5 percent, the credit conversion factors

would be applied to the outstanding balance of the investors'

interest as follows:

Example of Credit Conversion Factor Assignment by Segment of Excess

Spread Differential

h. Limitations on risk-based capital requirements. * * *

iv. For a bank holding company subject to the early amortization

treatment in section III.B.3.g. of this appendix, the total risk-

based capital requirement for all of the bank's exposures to a

securitization of revolving retail credit facilities is limited to

the greater of the risk-based capital requirement for residual

interests, as defined in section III.B.3.a. of this appendix, or the

risk-based capital requirement for the underlying securitized assets

calculated as if the bank holding company continued to hold the

assets on its balance sheet.

* * * * *

6. Asset-backed commercial paper programs. a. An asset-backed

commercial paper (ABCP) program typically is a program through which

a bank holding company provides funding to its corporate customers

by sponsoring and administering a bankruptcy-remote special purpose

entity that purchases asset pools from, or extends loans to, the

banking organization's customers. The ABCP program raises the cash

to provide the funding through the issuance of commercial paper in

the market.

b. A bank holding company that qualifies as a primary

beneficiary and must consolidate an ABCP program that is defined as

a variable interest entity under GAAP may exclude the consolidated

ABCP program assets from risk-weighted assets provided that the bank

is the sponsor of the consolidated ABCP program. If a bank holding

company excludes such consolidated ABCP program assets, the bank

holding company must assess the appropriate risk-based capital

charge against any risk exposures of the organization arising in

connection with such ABCP programs, including direct credit

substitutes, recourse obligations, residual interests, liquidity

facilities, and loans, in accordance with sections III.B.3, III.C.

and III.D. of this appendix.

* * * * *

III. * * *

D. * * *

2. Items with a 50 percent conversion factor. * * *

c. Commitments are defined as any legally binding arrangements

that obligate a banking organization to extend credit in the form of

loans or leases; to purchase loans, securities, or other assets; or

to participate in loans and leases. They also include overdraft

facilities, revolving credit, home equity and mortgage lines of

credit, eligible liquidity facilities to asset-backed commercial

paper programs (in form or in substance), and similar transactions.

Normally, commitments involve a written contract or agreement and a

commitment fee, or some other form of consideration. Commitments are

included in weighted-risk assets regardless of whether they contain

``material adverse change'' clauses or other provisions that are

intended to relieve the issuer of its funding obligation under

certain conditions. In the case of commitments structured as

syndications, where the banking organization is obligated solely for

its pro rata share, only the organization's proportional share of

the syndicated commitment is taken into account in calculating the

risk-based capital ratio. Banking organizations that are subject to

the market risk rules are required to convert the notional amount of

long-term covered positions carried in the trading account that act

as eligible liquidity facilities to ABCP programs, in form or in

substance, at 50 percent to determine the appropriate credit

equivalent amount for those facilities even though they are

structured or characterized as derivatives or other trading book

assets.

* * * * *

3. Items with a 20 percent conversion factor. * * *

a. * * *

b. Undrawn portions of eligible liquidity facilities with an

original maturity of one year or less, that banking organizations

provide to asset-backed commercial paper (ABCP) programs also are

converted at 20 percent. The resulting credit equivalent amount is

then assigned to the risk category appropriate to the underlying

assets or the obligor, after consideration of any collateral or

guarantees, or external credit ratings, if applicable. Banking

organizations that are subject to the market risk rules are required

to convert the notional amount of short-term covered positions

carried in the trading account that act as eligible liquidity

facilities to ABCP programs, in form or in substance, at 20 percent

to determine the appropriate credit equivalent amount for those

facilities even though they are structured or characterized as

derivatives or other trading book assets. Liquidity facilities

extended to ABCP programs that do not meet the following criteria

are to be considered recourse obligations or direct credit

substitutes and assessed the appropriate risk-based capital

requirement in accordance with section III.B.3. of this appendix.

Eligible liquidity facilities must be subject to a reasonable asset

quality test at the time of draw that precludes funding against

assets in the ABCP program that are 60 days or more past due or in

default. In addition, if the assets that eligible liquidity

facilities are required to fund against are externally rated

exposures, the facility can be used to fund only those exposures

that are externally rated investment grade at the time of funding.

Furthermore, liquidity facilities must contain provisions that,

prior to any draws, reduces the banking organization's funding

obligation to cover only those assets that would meet the funding

criteria under the facilities' asset quality tests.

4. * * * These include unused portions of commitments, with the

exception of eligible liquidity facilities provided to ABCP

programs, with an original maturity of one year or less, or which

are unconditionally cancelable at any time, provided a separate

credit decision is made before each drawing under the facility. * *

*

* * * * *

3. Amend appendix E to part 225 by adding two new sentences at the

end of section 2.(a). to read as follows:

Appendix E to Part 225--Capital Adequacy Guidelines for Bank Holding

Companies; Market Risk Measure

* * * * *

Section 2. Definitions * * *

(a) * * * Covered positions exclude all positions in a banking

organization's trading account that, in form or in substance, act as

eligible liquidity facilities (as defined in section III.B.3.a. of

appendix A of this part) to asset-backed commercial paper programs

(as defined in section III.B.6. of appendix A of this part). Such

excluded positions are subject to the risk-based capital

requirements set forth in appendix A of this part.

* * * * *

[[Page 56582]]

By order of the Board of Governors of the Federal Reserve

System, September 12, 2003.

Jennifer J. Johnson,

Secretary of the Board.

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Chapter III

Authority and Issuance

For the reasons set forth in the joint preamble, the Board of

Directors of the Federal Deposit Insurance Corporation proposes to

amend part 325 of chapter III of title 12 of the Code of Federal

Regulations as follows:

PART 325--CAPITAL MAINTENANCE

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

follows:

Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),

1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),

1828(o), 1831o, 1835, 3907, 3909, 4808; Pub. L. 102-233, 105 Stat.

1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat.

2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 2233 (12

U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, as amended

by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note).

2. In Appendix A to part 325, the following amendments are

proposed:

a. Section I.A.1. is revised.

b. In section II.B.5 --

i. Paragraph (a), Definitions, is revised.

ii. Paragraph (h), Limitations on risk-based capital requirements,

and paragraph (i), Alternative Capital Calculation for Small Business

Obligations, are redesignated as paragraphs (i) and (j) respectively.

iii. A new paragraph (h), Early amortization triggers, is added.

iv. A new paragraph (4), is added to the redesignated paragraph

(i).

c. Section II.B.6. is revised.

d. In section II.D--

i. The last sentence of the introductory paragraph is removed;

ii. In paragraph 2., Items With a 50 Percent Conversion Factor, the

four undesignated paragraphs are designated 2.a. through 2.d. and newly

designated 2.c. is revised;

iii. In paragraph 3, Items With a 20 Percent Conversion Factor, the

first undesignated paragraph is designated as 3.a. and a new paragraph

3.b. is added;

iv. The first sentence in paragraph 4., Items With a Zero Percent

Conversion Factor, is revised.

e. Tables III and IV are removed.

APPENDIX A TO PART 325--STATEMENT OF POLICY ON RISK-BASED CAPITAL

* * * * *

I. * * *

A. * * *

1. Core capital elements (Tier 1) consists of:

i. Common stockholders' equity capital (includes common stock

and related surplus, undivided profits, disclosed capital reserves

that represent a segregation of undivided profits, and foreign

currency translation adjustments, less net unrealized holding losses

on available-for-sale equity securities with readily determinable

fair values);

ii. Noncumulative perpetual preferred stock,\2\ including any

related surplus; and

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

\2\ Preferred stock issues where the dividend is reset

periodically based, in whole or in part, upon the bank's current

credit standing, including but not limited to, auction rate, money

market or remarketable preferred stock, are assigned to Tier 2

capital, regardless of whether the dividends are cumulative or

noncumulative.

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

iii. Minority interests in the equity capital accounts of

consolidated subsidiaries.

(a) At least 50 percent of the qualifying total capital base

should consist of Tier 1 capital. Core (Tier 1) capital is defined

as the sum of core capital elements minus all intangible assets

(other than mortgage servicing assets, nonmortgage servicing assets

and purchased credit card relationships eligible for inclusion in

core capital pursuant to Sec. 325.5(f),\3\ minus credit-enhancing

interest-only strips that are not eligible for inclusion in core

capital pursuant to Sec. 325.5(f), minus any disallowed deferred

tax assets, and minus any amount of nonfinancial equity investments

required to be deducted pursuant to section II.B.(6) of this

Appendix.

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

\3\ An exception is allowed for intangible assets that are

explicitly approved by the FDIC as part of the bank's regulatory

capital on a specific case basis. These intangibles will be included

in capital for risk-based capital purposes under the terms and

conditions that are specifically approved by the FDIC.

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

(b) Although nonvoting common stock, noncumulative perpetual

preferred stock, and minority interests in the equity capital

accounts of consolidated subsidiaries are normally included in Tier

1 capital, voting common stockholders' equity generally will be

expected to be the dominant form of Tier 1 capital. Thus, banks

should avoid undue reliance on nonvoting equity, preferred stock and

minority interests.

(c) Although minority interests in consolidated subsidiaries are

generally included in regulatory capital, exceptions to this general

rule will be made if the minority interests fail to provide

meaningful capital support to the consolidated bank. Such a

situation could arise if the minority interests are entitled to a

preferred claim on essentially low risk assets of the subsidiary.

Similarly, although credit-enhancing interest-only strips and

intangible assets in the form of mortgage servicing assets,

nonmortgage servicing assets and purchased credit card relationships

are generally recognized for risk-based capital purposes, the

deduction of part or all of the credit-enhancing interest-only

strips, mortgage servicing assets, nonmortgage servicing assets and

purchased credit card relationships may be required if the carrying

amounts of these assets are excessive in relation to their market

value or the level of the bank's capital accounts. Credit-enhancing

interest-only strips, mortgage servicing assets, nonmortgage

servicing assets, purchased credit card relationships and deferred

tax assets that do not meet the conditions, limitations and

restrictions described in Sec. 325.5(f) and (g) of this part will

not be recognized for risk-based capital purposes.

(d) Minority interests in small business investment companies,

investment funds that hold nonfinancial equity investments (as

defined in section II.B.(6)(ii) of this appendix A), and

subsidiaries that are engaged in nonfinancial activities are not

included in the bank's Tier 1 or total capital base if the bank's

interest in the company or fund is held under one of the legal

authorities listed in section II.B.(6)(ii) of this appendix A. In

addition, minority interests in consolidated asset-backed commercial

paper programs that are sponsored by a bank are not to be included

in the bank's Tier 1 or total capital base if the bank excludes the

consolidated assets of such programs from risk-weighted assets

pursuant to section II.B.6. of this appendix.

* * * * *

II. * * *

B. * * *

5. * * *

a. Definitions--(1) Credit derivative means a contract that

allows one party (the ``protection purchaser'') to transfer the

credit risk of an asset or off-balance sheet credit exposure to

another party (the ``protection provider''). The value of a credit

derivative is dependent, at least in part, on the credit performance

of the ``reference asset.''

(2) Credit-enhancing interest only strip is defined in Sec.

325.2(g).

(3) Credit-enhancing representations and warranties means

representations and warranties that are made or assumed in

connection with a transfer of assets (including loan servicing

assets) and that obligate the bank to protect investors from losses

arising from credit risk in the assets transferred or the loans

serviced. Credit-enhancing representations and warranties include

promises to protect a party from losses resulting from the default

or nonperformance of another party or from an insufficiency in the

value of the collateral. Credit-enhancing representations and

warranties do not include:

(i) Early default clauses and similar warranties that permit the

return of, or premium refund clauses covering, 1-4 family

residential first mortgage loans that qualify for a 50 percent risk

weight for a period not to exceed 120 days from the date of

transfer. These warranties may cover only those loans that were

originated within 1 year of the date of transfer;

(ii) Premium refund clauses that cover assets guaranteed, in

whole or in part, by the U.S. Government, a U.S. Government agency

or a government-sponsored enterprise, provided the premium refund

clauses are for a period not to exceed 120 days from the date of

transfer; or

(iii) Warranties that permit the return of assets in instances

of misrepresentation, fraud or incomplete documentation.

[[Page 56583]]

(4) Direct credit substitute means an arrangement in which a

bank assumes, in form or in substance, credit risk associated with

an on-or off-balance sheet credit exposure that was not previously

owned by the bank (third-party asset) and the risk assumed by the

bank exceeds the pro rata share of the bank's interest in the third-

party asset. If the bank has no claim on the third-party asset, then

the bank's assumption of any credit risk with respect to the third

party asset is a direct credit substitute. Direct credit substitutes

include, but are not limited to:

(i) Financial standby letters of credit, which includes any

letter of credit or similar arrangement, however named or described,

that support financial claims on a third party that exceed a bank's

pro rata share of losses in the financial claim;

(ii) Guarantees, surety arrangements, credit derivatives, and

irrevocable guarantee-type instruments backing financial claims such

as outstanding loans, or other financial claims, or that back off-

balance-sheet items against which risk-based capital must be

maintained;

(iii) Purchased subordinated interests or securities that absorb

more than their pro rata share of credit losses from the underlying

assets. Purchased subordinated interests that are credit-enhancing

interest-only strips are subject to the higher capital charge

specified in section II.B.5.(f) of this appendix A;

(iv) Entering into a credit derivative contract under which the

bank assumes more than its pro rata share of credit risk on a third

party asset or exposure;

(v) Loans or lines of credit that provide credit enhancement for

the financial obligations of an account party;

(vi) Purchased loan servicing assets if the servicer:

(A) Is responsible for credit losses with the loans being

serviced,

(B) Is responsible for making servicer cash advances (unless the

advances are not direct credit substitutes because they meet the

conditions specified in section II.B.5(a)(9) of this appendix A), or

(C) Makes or assumes credit-enhancing representations and

warranties with respect to the loans serviced; and

(vii) Clean-up calls on third party assets. Clean-up calls that

are exercisable at the option of the bank (as servicer or as an

affiliate of the servicer) when the pool balance is 10 percent or

less of the original pool balance are not direct credit substitutes.

(viii.) Liquidity facilities extended to ABCP programs that are

not eligible liquidity facilities (as defined in section II.B.5.a.

of this appendix).

(5) Early amortization triggers mean contractual requirements

that, if triggered, would cause a securitization to begin repaying

investors prior to the originally scheduled payment dates.

(6) Eligible liquidity facility means a facility subject to a

reasonable asset quality test at the time of draw that precludes

funding against assets in the ABCP program that are 60 days or more

past due or in default. In addition, if the assets that an eligible

liquidity facility is required to fund against are externally rated

exposures at the inception of the facility, the facility can be used

to fund only those exposures that are externally rated investment

grade at the time of funding. Furthermore, an eligible liquidity

facility must contain provisions that, prior to any draws, reduces

the bank's funding obligation to cover only those assets that would

meet the funding criteria under the facility's asset quality tests.

(7) Excess spread means gross finance charge collections and

other income received by the trust or special purpose entity (SPE)

minus certificate interest, servicing fees, charge-offs, and other

trust or SPE expenses.

(8) Externally rated means that an instrument or obligation has

received a credit rating from a nationally-recognized statistical

rating organization.

(9) Face amount means the notional principal, or face value,

amount of an off-balance sheet item; the amortized cost of an asset

not held for trading purposes; and the fair value of a trading

asset.

(10) Financial asset means cash or other monetary instrument,

evidence of debt, evidence of an ownership interest in an entity, or

a contract that conveys a right to receive or exchange cash or

another financial instrument from another party.

(11) Financial standby letter of credit means a letter of credit

or similar arrangement that represents an irrevocable obligation to

a third-party beneficiary:

(i) To receive money borrowed by, or advanced to, or advanced

to, or for the account of, a second party (the account party), or

(ii) To make payment on behalf of the account party, in the

event that the account party fails to fulfill its obligation to the

beneficiary.

(12) Mortgage servicer cash advance means funds that a

residential mortgage servicer advances to ensure an uninterrupted

flow of payments or the timely collection of residential mortgage

loans, including disbursements made to cover foreclosure costs or

other expenses arising from a mortgage loan to facilitate its timely

collection. A mortgage servicer cash advance is not a recourse

obligation or a direct credit substitute if:

(i) The mortgage servicer is entitled to full reimbursement or,

for any one residential mortgage loan, nonreimbursable advances are

contractually limited to an insignificant amount of the outstanding

principal on that loan, and

(ii) the servicer's entitlement to reimbursement in not

subordinated.

(13) Nationally recognized statistical rating organization

(NRSRO) means an entity recognized by the Division of Market

Regulation of the Securities and Exchange Commission (or any

successor Division) (Commission) as a nationally recognized

statistical rating organization for various purposes, including the

Commission's uniform net capital requirements for brokers and

dealers (17 CFR 240.15c3-1).

(14) Recourse means an arrangement in which a bank retains, in

form or in substance, of any credit risk directly or indirectly

associated with an asset it has sold (in accordance with generally

accepted accounting principles) that exceeds a pro rata share of the

bank's claim on the asset. If a bank has no claim on an asset it has

sold, then the retention of any credit risk is recourse. A recourse

obligation typically arises when an institution transfers assets in

a sale and retains an obligation to repurchase the assets or absorb

losses due to a default of principal or interest or any other

deficiency in the performance of the underlying obligor or some

other party. Recourse may exist implicitly where a bank provides

credit enhancement beyond any contractual obligation to support

assets it has sold. The following are examples of recourse

arrangements:

(i) Credit-enhancing representations and warranties made on the

transferred assets;

(ii) Loan servicing assets retained pursuant to an agreement

under which the bank:

(A) Is responsible for losses associated with the loans being

serviced,

(B) Is responsible for making mortgage servicer cash advances

(unless the advances are not a recourse obligation because they meet

the conditions specified in section II.B.5(a)(12) of this appendix

A), or

(C) Makes or assumes credit-enhancing representations and

warranties on the serviced loans;

(iii) Retained subordinated interests that absorb more than

their pro rata share of losses from the underlying assets;

(iv) Assets sold under an agreement to repurchase, if the assets

are not already included on the balance sheet;

(v) Loan strips sold without contractual recourse where the

maturity of the transferred portion of the loan is shorter than the

maturity of the commitment under which the loan is drawn;

(vi) Credit derivative contracts under which the bank retains

more than its pro rata share of credit risk on transferred assets;

and

(vii) Clean-up calls. Clean-up calls that are exercisable at the

option of the bank (as servicer or as an affiliate of the servicer)

when the pool balance is 10 percent or less of the original pool

balance are not recourse arrangements.

(viii.) Liquidity facilities extended to ABCP programs that are

not eligible liquidity facilities (as defined in section II.B.5.a.

of this appendix).

(15) Residual interest means any on-balance sheet asset that

represents an interest (including a beneficial interest) created by

a transfer that qualifies as a sale (in accordance with generally

accepted accounting principles) of financial assets, whether through

a securitization or otherwise, and that exposes a bank to credit

risk directly or indirectly associated with the transferred assets

that exceeds a pro rata share of the bank's claim on the assets,

whether through subordination provisions or other credit enhancement

techniques. Residual interests generally include credit-enhancing I/

Os, spread accounts, cash collateral accounts, retained subordinated

interests, other forms of over-collateralization, and similar assets

that function as a credit enhancement. Residual interests further

include those exposures that, in substance, cause the bank to retain

the credit risk of an asset or exposure that had qualified as a

residual interest before it was sold. Residual interests generally

do not include interests purchased

[[Page 56584]]

from a third party, except that purchased credit-enhancing I/Os are

residual interests.

(16) Revolving retail credit facility means an exposure to an

individual where the borrower is permitted to vary both the drawn

amount and the amount of repayment within an agreed limit under a

line of credit (such as credit card accounts). Revolving retail

credits include business credit card accounts.

(17) Risk participation means a participation in which the

originating party remains liable to the beneficiary for the full

amount of an obligation (e.g., a direct credit substitute)

notwithstanding that another party has acquired a participation in

that obligation.

(18) Securitization means the pooling and repackaging by a

special purpose entity of assets or other credit exposures into

securities that can be sold to investors. Securitization includes

transactions that generally create stratified credit risk positions

whose performance is dependent upon an underlying pool of credit

exposures, including loans and commitments.

(19) Sponsor means a bank that establishes an asset-backed

commercial paper program; approves the sellers permitted to

participate in the program; approves the asset pools to be purchased

by the program; or administers the asset-backed commercial paper

program by monitoring the assets, arranging for debt placement,

compiling monthly reports, or ensuring compliance with the program

documents and with the program's credit and investment policy.

(20) Structured finance program means a program where receivable

interests and asset-backed securities issued by multiple

participants are purchased by a special purpose entity that

repackages those exposures into securities that can be sold to

investors. Structured finance programs allocate credit risks,

generally, between the participants and credit enhancement provided

to the program.

(21) Traded position means a position or asset-backed security

that is retained, assumed or issued in connection with a

securitization that is externally rated, where there is a reasonable

expectation that, in the near future, the rating will be relied upon

by

(i) Unaffiliated investors to purchase the position; or

(ii) An unaffiliated third party to enter into a transaction

involving the position, such as a purchase, loan, or repurchase

agreement.

* * * * *

(h) Early Amortization Triggers. i. A bank that originates

securitizations of revolving retail credit facilities that contain

early amortization triggers must incorporate the off-balance sheet

portion of such a securitization (that is, the investors' interest)

into the bank's risk-weighted assets by multiplying the outstanding

principal amount of the investors' interest by the appropriate

credit conversion factor and then assigning the resultant credit

equivalent amount to the appropriate risk weight category. The

credit conversion factor to be applied to such a securitization

generally is a function of the securitizations' most recent three-

month average excess spread level, the point at which excess spread

in the securitization must be trapped in a spread or reserve

account, and the excess spread level at which an early amortization

of the securitization is triggered.

ii. In order to determine the appropriate credit conversion

factor to be applied to the outstanding principal balance of the

investors' interest, the originating bank must compare the

securitization's most recent three-month average excess spread level

against the difference between the point at which the bank is

required by the securitization documents to divert and trap excess

spread (spread trapping point) in a spread or reserve account and

the excess spread level at which early amortization of the

securitization is triggered (early amortization trigger). The

difference between the spread trapping point and the early

amortization trigger is referred to as the excess spread

differential (ESD). In a securitization of revolving retail credit

facilities that employs the concept of excess spread to determine

when an early amortization is triggered but where the

securitization's transaction documents do not require excess spread

to be diverted to a spread or reserve account at a certain level,

the ESD is deemed to be 4.5 percentage points.

iii. If a securitization of revolving retail credit facilities

does not employ the concept of excess spread as the transaction's

determining factor of when an early amortization is triggered, then

a 10 percent credit conversion factor is applied to the outstanding

principal balance of the investors' interest at the securitization's

inception.

iv. The ESD must then be divided to create four equal ESD

segments. For example, when the ESD is 4.5 percent, this amount is

divided into 4 equal ESD segments of 112.5 basis points. A credit

conversion factor of zero percent would be applied to the

outstanding principal balance of the investors' interest if the

securitization's three-month average excess spread equaled or

exceeded a securitization's spread trapping point (4.5 percent in

the example). Credit conversion factors of 5 percent, 10 percent, 50

percent, and 100 percent are then assigned to each of the four equal

ESD segments in descending order beginning at the spread trapping

point as the securitization approaches early amortization. For

instance, when the ESD is 4.5 percent, the credit conversion factors

would be applied to the outstanding balance of the investors'

interest as follows:

Example of Credit Conversion Factor Assignment by Segment of Excess

Spread Differential

i. Limitations on risk-based capital requirements. * * *

(4) For a bank subject to the early amortization treatment in

section III.B.3.g. of this appendix, the total risk-based capital

requirement for all of the bank's exposures to a securitization of

revolving retail credit facilities is limited to the greater of the

risk-based capital requirement for residual interests, as defined in

section III.B.3.a. of this appendix, or the risk-based capital

requirement for the underlying securitized assets calculated as if

the bank continued to hold the assets on its balance sheet.

* * * * *

6. Asset-backed commercial paper programs. a. An asset-backed

commercial paper (ABCP) program typically is a program through which

a bank provides funding to its corporate customers by sponsoring and

administering a bankruptcy-remote special purpose entity that

purchases asset pools from, or extends loans to, the bank's

customers. The ABCP program raises the cash to provide the funding

through the issuance of commercial paper in the market.

b. A bank that qualifies as a primary beneficiary and must

consolidate an ABCP program that is defined as a variable interest

entity under GAAP may exclude the consolidated ABCP program assets

from risk-weighted assets provided that the bank is the sponsor of

the consolidated ABCP program. If a bank excludes such consolidated

ABCP program assets, the bank must assess the appropriate risk-based

capital charge against any risk exposures of the bank arising in

connection with such ABCP programs, including direct credit

substitutes, recourse obligations, residual interests, liquidity

facilities, and loans, in accordance with sections II.B.5, II.C. and

II.D. of this appendix.

* * * * *

II. * * *

D. * * *

2. Items With a 50 Percent Conversion Factor. * * *

* * * * *

c. Commitments, for risk-based capital purposes, are defined as

any legally binding arrangements that obligate a bank to extend

credit in the form of loans or lease financing receivables; to

purchase loans, securities, or other assets; or to participate in

loans and leases. Commitments also include overdraft facilities,

revolving credit, home equity and mortgage lines of credit, eligible

liquidity facilities to asset-backed commercial paper programs (in

form and in substance), and similar transactions. Normally,

commitments involve a written contract or agreement and a commitment

fee, or some other form of consideration. Commitments are included

in weighted-risk assets regardless of whether they contain material

adverse change clauses or other provisions that are intended to

relieve the issuer of its funding obligation under certain

conditions. Banks that are subject to the market risk rules are

required to convert the notional amount of long-term covered

positions carried in the trading account that act as eligible

liquidity facilities to ABCP programs, in form or in substance, at

50 percent to determine the appropriate

[[Page 56585]]

credit equivalent amount for those facilities even though they are

structured or characterized as derivatives or other trading book

assets.

* * * * *

3. Items with a 20 percent conversion factor. * * *

a. * * *

b. Undrawn portions of eligible liquidity facilities with an

original maturity of one year or less that banks provide to asset-

backed commercial paper (ABCP) programs also are converted at 20

percent. The resulting credit equivalent amount is then assigned to

the risk category appropriate to the underlying assets or the

obligor, after consideration of any collateral or guarantees, or

external credit ratings, if applicable. Banks that are subject to

the market risk rules are required to convert the notional amount of

short-term covered positions carried in the trading account that act

as eligible liquidity facilities to ABCP programs, in form or in

substance, at 20 percent to determine the appropriate credit

equivalent amount for those facilities even though they are

structured or characterized as derivatives or other trading book

assets. Liquidity facilities extended to ABCP programs that do not

meet the following criteria are to be considered recourse

obligations or direct credit substitutes and assessed the

appropriate risk-based capital requirement in accordance with

section II.B.5. of this appendix. Eligible liquidity facilities must

be subject to a reasonable asset quality test at the time of draw

that precludes funding against assets in the ABCP program that are

60 days or more past due or in default. In addition, if the assets

that eligible liquidity facilities are required to fund against are

externally rated exposures, the facility can be used to fund only

those exposures that are externally rated investment grade at the

time of funding. Furthermore, eligible liquidity facilities must

contain provisions that, prior to any draws, reduces the bank's

funding obligation to cover only those assets that would meet the

funding criteria under the facilities' asset quality tests. * * *

4. * * * These include unused portions of commitments, with the

exception of eligible liquidity facilities provided to ABCP

programs, with an original maturity of one year or less, or which

are unconditionally cancelable at any time, provided a separate

credit decision is made before each drawing under the facility. * *

*

* * * * *

3. In appendix C to part 325, add two new sentences to the end of

section 2.(a) to read as follows:

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

Market Risk

Section 2. Definitions.

(a) * * * Covered positions exclude all positions in a bank's

trading account that, in form or in substance, act as eligible

liquidity facilities (as defined in section II.B.5.a. of appendix A

of this part), to asset-backed commercial paper programs (as defined

in section II.B.6. of appendix A of this part). Such excluded

positions are subject to the risk-based capital requirements set

forth in appendix A of this part.

* * * * *

Dated at Washington, DC, this 5th day of September 2003.

By order of the Board of Directors.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Chapter V

Authority and Issuance

For the reasons set out in the preamble, part 567 of chapter V of

title 12 of the Code of Federal Regulations is proposed to be amended

as follows:

PART 567--CAPITAL

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

follows:

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

(note).

2. Section 567.1 is amended by adding definitions of early

amortization trigger, excess spread, qualifying liquidity facility, and

revolving retail credit in alphabetical order to read as follows:

Sec. 567.1 Definitions.

* * * * *

Early amortization trigger. The term early amortization trigger

means a contractual requirement that, if triggered, would cause a

securitization to begin repaying investors prior to the originally

scheduled payment dates.

* * * * *

Excess spread. The term excess spread means gross finance charge

collections and other income received by the trust or special purpose

entity minus certificate interest, servicing fees, charge-offs, and

other trust or special purpose entity expenses.

* * * * *

Qualifying liquidity facility. The term qualifying liquidity

facility means a liquidity facility provided to an ABCP program

provided that:

(1) At the time of the draw, the liquidity facility must be subject

to a reasonable asset quality test that precludes funding against or

purchase of assets from the ABCP program that are 60 days or more past

due or in default;

(2) If the assets that the liquidity facility is required to fund

are externally rated securities, (at the time they are transferred into

the program) the facility can be used to fund only exposures that are

externally rated investment grade at the time of funding; and

(3) The liquidity facility must provide that, prior to any draws,

the savings association's funding obligation is reduced to cover only

those assets that satisfy the funding criteria under the asset quality

test of the liquidity facility.

* * * * *

Revolving retail credit. The term revolving retail credit means an

exposure to an individual or a business where the borrower is permitted

to vary both the drawn amount and the amount of repayment within an

agreed limit under a line of credit (such as personal or business

credit card accounts).

* * * * *

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

follows:

Sec. 567.5 Components of capital.

(a) * * *

(1) * * *

(iii) Minority interests in the equity accounts of subsidiaries

that are fully consolidated. However, minority interests in

consolidated ABCP programs sponsored by a savings association are

excluded from the association's core capital or total capital base if

the consolidated assets are excluded from risk-weighted assets pursuant

to Sec. 567.6 (a)(3);

* * * * *

4. Amend Sec. 567.6 by:

A. Revising paragraph (a)(2)(ii)(B);

B. Redesignating paragraph (a)(2)(iii) as paragraph (a)(2)(iii)(A);

C. Adding paragraph (a)(2)(iii)(B);

D. Revising paragraph (a)(2)(iv)(A);

E. Removing paragraph (a)(3)(iv);

F. Adding paragraph (b)(9).

Sec. 576.6 Risk-based capital credit risk-weight categories.

(a) * * *

(2) * * *

(ii) * * *

(B) Unused portions of commitments, including home equity lines of

credit and qualifying liquidity facilities with an original maturity

exceeding one year except those listed in paragraph (a)(2)(iv) of this

section; and

* * * * *

(iii) 20 percent credit conversion factor (Group C). * * *

(B) Undrawn portions of qualifying liquidity facilities with an

original maturity of one year or less that a savings association

provides to ABCP programs.

(iv) Zero percent credit conversion factor (Group D). (A) Unused

commitments, with the exception of liquidity facilities provided to

ABCP

[[Page 56586]]

programs, with an original maturity of one year or less.

* * * * *

(b) * * *

(9) Early amortization. (i) A savings association that originates a

securitization of revolving retail credits that contains early

amortization triggers must risk weight the off-balance sheet portion of

such a securitization (investors' interest) by multiplying the

outstanding principal amount of the investors' interest by the

appropriate credit conversion factor as provided by paragraph

(b)(9)(ii) or (iii) of this section and then assigning the resultant

credit equivalent amount to the appropriate risk weight category.

(ii) Calculation of credit conversion factor. (A) The credit

conversion factor to be applied to such a securitization generally is a

function of the securitizations' most recent three-month average excess

spread level, the point at which excess spread in the securitization

must be trapped in a spread or reserve account (spread trapping point),

and the excess spread level at which an early amortization of the

securitization is triggered (early amortization trigger). This

difference between the spread trapping point and the early amortization

trigger is the excess spread differential.

(B) The excess spread differential must then be divided by four to

create the standard excess spread differential value. This value will

be used to determine the appropriate credit conversion factor in

accordance with Table D of this section. The upper and lower bounds for

each of the excess spread differential segments is calculated using the

spread trapping point and the standard excess spread differential value

in accordance with the formulas provided in Table D of this section.

However, if the securitization documents do not require excess spread

to be diverted to a spread or reserve account at a certain level, the

excess spread differential is equal to 4.5 percentage points.

(C) (1) If the three-month average excess spread equals or exceeds

the securitization's spread trapping point, then the credit conversion

factor is equal to zero. If the three-month average excess spread is

less than the spread trapping point, then the credit conversion factors

(5 percent, 10 percent, 50 percent, and 100 percent) are then assigned

to each of the four equal excess spread differential segments in

descending order, beginning at the spread trapping point as the

securitization approaches early amortization, in accordance with Table

D of this section.

(2) If the securitization does not use the excess spread as an

early amortization trigger, then a 10 percent credit conversion factor

is applied to the current outstanding principal balance of the

investors' interest.

monty Table D.--Calculation of Credit Conversion Factors for Early

Amortizations

(iii) Limitations on risk-based capital requirements. For a savings

association subject to the early amortization requirements in paragraph

(b)(9) of this section, the total risk-based capital requirement for

all of the savings association's exposures to a securitization of

revolving retail credits is limited to the greater of the risk-based

capital requirement for residual interests or the risk-based capital

requirement for the underlying securitized assets calculated as if the

savings association continued to hold the assets on its balance sheet.

* * * * *

Dated: September 9, 2003.

By the Office of Thrift Supervision.

James E. Gilleran,

Director.

[FR Doc. 03-23757 Filed 9-30-03; 8:45 am]

BILLING CODE 4801-01-P