via email
BANK ONE
November 17, 2003
Public
Information Room
Office of
the Comptroller of the Currency
2520 E Street, SW
Mailstop 1-5
Washington, D.C. 20219
|
Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
Attention: Comments/OES |
Ms. Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve
System
20th Street and Constitution Ave, NW
Washington, D.C. 20551 |
Regulation Comments
Chief Counsel's Office
Office of Thrift Supervision
1700 G. Street, N.W.
Washington, DC 20522 |
Re: Notice of Proposed Rulemaking Regarding Asset-Backed Commercial
Paper ("ABCP") Programs and Early Amortization Provisions
Ladies and Gentlemen:
Bank One Corporation ("Bank One") is pleased to have the opportunity
to comment on the notice of proposed rulemaking ("NPR") regarding ABCP
programs and early amortization provisions recently published by the
Board of Governors of the Federal Reserve System (the "Board"), the
Federal Deposit Insurance Corporation (the "FDIC"), the Office of the
Comptroller of the Currency (the "OCC") and the Office of Thrift
Supervision (the "OTS") (together, the "Agencies"). Bank One is the
nation's sixth-largest bank holding company, with assets of
approximately $300 billion, providing a wide array of lending products
to commercial, institutional and retail customers. We believe Bank One
is well qualified to comment on the NPR.
We appreciate the Agencies' prompt response to the implementation of
the Financial Accounting Standards Board's Interpretation No. 46 ("FIN
46") on banking organizations' riskbased capital calculations. We
support the Agencies efforts to resolve issues created by recent changes
to accounting treatment of variable interest entities resulting from FIN
46, including proposals regarding the treatment of liquidity facilities.
We have set forth our specific comments on the NPR below.
Notice of Proposed Rulemaking
I. ABCP Programs/Treatment of Liquidity Facilities
A. Credit Conversion Factors
As drafted in the NPR, the Agencies will require a credit conversion
factor for liquidity facilities of either 20% for liquidity facilities
with original maturities of 364 days or less, or 50% for liquidity
facilities with original maturities of greater than one year. These
conversion factors are consistent with those currently proposed under
the new Basel II capital accord ("BIS II") for all externally rated
asset-backed securities transactions, and while appropriate for some
assets, they do not take into account the low loss given default of the
senior tranches which generally comprise the largest percentage of the
ABCP program transactions.
In addition, the conversion factors fail to adequately recognize risk
mitigation provided by structural considerations. These include asset
quality tests that protect the liquidity bank from funding defaulted
assets in the event of a liquidity draw and 364-day renewable liquidity
facilities that allow for annual re-evaluation and tightening of the
structural features in the transaction, when necessary. Risk mitigation
tools significantly reduce the risk of a ABCP program transaction versus
similarly rated transactions in the term asset-backed securities market.
Since 1988, Bank One has experienced very few liquidity draws and no
losses related to customer financing activity in ABCP programs. Based
upon the nature and low credit risk inherent in the short-term liquidity
facilities, a conversion factor lower than 20% would be appropriate in
many cases. We have noted that industry participants have submitted
recommendations for credit conversion factors ranging from 5% to 10%. We
support such a recommended range for short-term liquidity facilities.
B. Eligible Liquidity Facilities Requirements
In addition to the credit conversion factors for ABCP liquidity
facilities, the NPR requires certain eligibility and asset quality tests
to be made in order to apply credit conversion factors of less than
100%. Bank One believes a credit quality test used to determine the
credit risk and related risk based capital requirements inherent in an
ABCP program liquidity facility is appropriate. However, we believe that
such a test should be specific to the credit requirements of a specific
transaction or asset type. A "generic" 60-day delinquency asset quality
test standard will not appropriately assess credit risk or determine
capital requirements for liquidity facilities. As such, we recommend
that the NPR eligible liquidity facility definition be replaced with a
requirement for each bank to seek approval from its primary regulator
for reasonable asset quality tests. This approach (of allowing an
individual bank to obtain approval) is similar to that taken by the
Agencies for direct credit substitutes and internal rating
methodologies.
We believe that our recommendations are supported by industry
conditions and ABCP program marketplace convention. Generally for ABCP
program liquidity facility agreements, the liquidity provider purchases
a specific underlying ABCP conduit asset pool at fair value which is a
price that is either par or less than par. A purchase price is
determined based upon certain credit-related "triggers" incorporated
into the liquidity facility agreement.
Credit-related triggers that determine the purchase price vary based
upon the specific transactions as well as the underlying asset pool
characteristics. Credit-related triggers are generally one of two types:
ratings based triggers or cash flow/financial benchmark triggers. Both
of these types of triggers are found in industry practice, depending on
the transaction structure.
Ratings based triggers in ABCP program liquidity facilities can be
based upon the rating of the underlying seller, the transaction itself1
(if externally rated) or a transaction guarantor. For example, the
liquidity facility may be "wrapped" by a third party guarantee for the
entire facility. Therefore, cash flows within the actual deal are
supported by the third party guarantee. Such a liquidity facility would
have asset quality triggers based upon the credit rating of the
guarantor. The timing or delinquency of cash flows is less relevant in
determining the credit quality of the transaction. For externally rated
transactions, a similar ratings criterion (of the transaction itself),
not a cash flow delinquency criterion, is often used to determine the
purchase price adjustment.
For cash flow/financial benchmark triggers, purchase price triggers
are often based upon certain cash flow and other underlying asset
financial benchmarks. Here, among other benchmarks, cash flow
delinquencies may be a contributor to the asset quality test that drives
the purchase price for a liquidity facility draw. Where delinquent cash
flow benchmarks are used, different underlying asset types have very
different charge off/delinquency standards. For example, trade
receivable pool transactions typically have a 60 to 90 day charge
off/delinquency standard for purposes of the asset quality triggers and
credit card receivable pool transactions would typically have a 120 to
180 day charge off/delinquency standard. Therefore, an arbitrary cut off
at the 60 day delinquency level in the case of credit card receivable
pool transactions would significantly overstate the risk of default as
the amount of credit cards that ultimately charge-off at 120 to 180
days.
In conjunction with the asset quality test requirements, we do not
believe that the limitation that prohibits liquidity facility draws for
transactions where the rating falls below investment grade is
appropriate. Such a requirement is irrelevant for non-ratings-based
triggered transactions where the asset quality is determined using cash
flow or other benchmarks. Further, it should be noted that all cash flow
and ratings based purchase price triggers are in place to adjust the
purchase price of the asset pool under the liquidity facility to ensure
that any credit risk of the underlying asset pool is incorporated into
the value of the draw thereby making the investment grade requirement
unnecessary.
Therefore, instead of a standardized eligible liquidity facility
definition and asset quality requirement as proposed in the NPR, we
believe that a more risk sensitive specific transaction or asset type
metric should be applied. More specifically, we recommend that the NPR
allow for each bank to seek approval for reasonable asset quality tests.
Such an approach would be based upon that bank's liquidity facility
programs and would incorporate the differences in how credit quality is
assessed and observed in industry practice for ABCP program liquidity
facilities. This approach would allow for a more accurate assessment of
risk exposure and be more consistent with the overall BIS II objectives.
II. Early Amortization Capital Charge
The NPR applies capital based upon the level of excess spread present
in the securitization. This approach requires increased capital as
spread income deteriorates on the securitized pool of assets. This
forces originators to raise capital at the time when it becomes too
expensive or is the least available.
Revolving retail securitizations function primarily as financing
vehicles, which utilize structural mechanisms to insulate the investor
from the credit risk of the receivables in all but catastrophic events.
The current treatment should be modified to apply capital based upon
risk weighting of the underlying assets. A risk weighting of less than
100% of the assets is appropriate, consistent with the risk inherent in
a pool of credit card receivables.
The current rules recognize risk in the assets by applying a dollar
for dollar capital charge to interest-only strips, spread accounts, and
accrued interest receivable. Alternatively, rather than creating a
framework based on excess spread to "correct" the current regulatory
treatment of securitized revolving receivables, we recommend that the
current treatment remain in place until BIS II is implemented.
Thank you for considering the views expressed in this letter. If you
have any questions on this comment letter or would like any additional
information, please do not hesitate to contact Melissa J. Moore at (312)
336-4060 or William L. Tabaka at (312) 336-3723.
* * *
__________________________________
1 For example, certain types conduits often purchase
investment securities that are externally rated on a transaction basis.
Very truly yours,
Melissa J. Moore
Controller and
Chief Accounting Officer
William L. Tabaka
Director of Reporting and
Accounting Policy
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