[Federal Register Volume 74, Number 177 (Tuesday, September 15, 2009)]
[Proposed Rules]
[Pages 47138-47148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-21497]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket ID: OCC-2009-0012]
RIN 1557-AD26
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R-1368]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
RIN 3064-AD48
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 567
[No. OTS-2009-0015]
RIN 1550-AC36
Risk-Based Capital Guidelines; Capital Adequacy Guidelines;
Capital Maintenance: Regulatory Capital; Impact of Modifications to
Generally Accepted Accounting Principles; Consolidation of Asset-Backed
Commercial Paper Programs; and Other Related Issues
AGENCY: Office of the Comptroller of the Currency, Department of the
Treasury; Board of Governors of the Federal Reserve System; Federal
Deposit Insurance Corporation; and Office of Thrift Supervision,
Department of the Treasury.
ACTION: Notice of proposed rulemaking with request for public comment.
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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 the Office of Thrift Supervision
(OTS) (collectively, the agencies) are requesting comment on a proposal
to modify their general risk-based and advanced risk-based capital
adequacy frameworks to eliminate the exclusion of certain consolidated
asset-backed commercial paper programs from risk-weighted assets and
provide a reservation of authority in their general risk-based and
advanced risk-based capital adequacy frameworks to permit the agencies
to require banking organizations to treat entities that are
[[Page 47139]]
not consolidated under accounting standards as if they were
consolidated for risk-based capital purposes, commensurate with the
risk relationship of the banking organization to the structure. The
agencies are issuing this proposal and request for comment to better
align capital requirements with the actual risk of certain exposures
and to obtain information and views from the public on the effect on
regulatory capital that will result from the implementation of the
Financial Accounting Standard Board's (FASB) Statement of Financial
Accounting Standards No. 166, Accounting for Transfers of Financial
Assets, an Amendment of FASB Statement No. 140 and Statement of
Financial Accounting Standards No. 167, Amendments to FASB
Interpretation No. 46(R).
DATES: Comments on this notice of proposed rulemaking must be received
by October 15, 2009.
ADDRESSES: Comments should be directed to:
OCC: Because paper mail in the Washington, DC area and at the
agencies is subject to delay, commenters are encouraged to submit
comments by the Federal eRulemaking Portal or e-mail, if possible.
Please use the title ``Risk-Based Capital Guidelines; Capital Adequacy
Guidelines; Capital Maintenance: Regulatory Capital; Impact of
Modifications to Generally Accepted Accounting Principles;
Consolidation of Asset-Backed Commercial Paper Programs; and Other
Related Issues'' to facilitate the organization and distribution of the
comments. You may submit comments by any of the following methods:
Federal eRulemaking Portal--``Regulations.gov'': Go to
http://www.regulations.gov. Under the ``More Search Options'' tab click
next to the ``Advanced Docket Search'' option where indicated, select
``Comptroller of the Currency'' from the agency drop-down menu, then
click ``Submit.'' In the ``Docket ID'' column, select ``OCC-2009-0012''
to submit or view public comments and to view supporting and related
materials for this proposed rule. The ``How to Use This Site'' link on
the Regulations.gov home page provides information on using
Regulations.gov, including instructions for submitting or viewing
public comments, viewing other supporting and related materials, and
viewing the docket after the close of the comment period.
E-mail: [email protected].
Mail: Office of the Comptroller of the Currency, 250 E
Street, SW., Mail Stop 2-3, Washington, DC 20219.
Fax: (202) 874-5274.
Hand Delivery/Courier: 250 E Street, SW., Mail Stop 2-3,
Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket Number OCC-2009-0012'' in your comment. In general, the OCC
will enter all comments received into the docket and publish them on
the Regulations.gov Web site without change, including any business or
personal information that you provide such as name and address
information, e-mail addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this proposed rule by any of the following methods:
Viewing Comments Electronically: Go to http://www.regulations.gov, under the ``More Search Options'' tab click next
to the ``Advanced Document Search'' option where indicated, select
``Comptroller of the Currency'' from the agency drop-down menu, then
click ``Submit.'' In the ``Docket ID'' column, select ``OCC-2009-0012''
to view public comments for this rulemaking action.
Viewing Comments Personally: You may inspect and photocopy
comments at the OCC, 250 E. Street, SW., Washington, DC. For security
reasons, the OCC requires that visitors make an appointment to inspect
comments. You may do so by calling (202) 874-4700. Upon arrival,
visitors must present valid government-issued photo identification and
submit to security screening in order to inspect and photocopy
comments.
Docket: You may view or request available background
documents and project summaries using the methods described above.
Board: You may submit comments, identified by Docket No. R-1368, by
any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include docket
number in the subject line of the message.
FAX: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Street, NW.) between 9 a.m. and 5 p.m. on weekdays.
FDIC: You may submit comments by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th
Street, NW., Washington, DC 20429.
Hand Delivered/Courier: 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.
E-mail: [email protected].
Instructions: Comments submitted must include ``FDIC'' and ``RIN
3064-AD48.'' Comments received will be posted without change to http://www.FDIC.gov/regulations/laws/federal/propose.html, including any
personal information provided.
OTS: You may submit comments, identified by OTS-2009-0015, by any
of the following methods:
Federal eRulemaking Portal: ``Regulations.gov'': Go to
http://www.regulations.gov. Under the ``more Search Options'' tab click
next to the ``Advanced Docket Search'' option where indicated, select
``Office of Thrift Supervision'' from the agency dropdown menu, then
click ``Submit.'' In the ``Docket ID'' column, select ``OTS-2009-0015''
to submit or view public comments and to view supporting and related
materials for this proposed rulemaking. The ``How to Use This Site''
link on the Regulations.gov home page provides information on using
Regulations.gov, including instructions for submitting or viewing
public comments, viewing other supporting and related materials, and
viewing the docket after the close of the comment period.
[[Page 47140]]
Mail: Regulation Comments, Chief Counsel's Office, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: OTS-2009-0015.
Facsimile: (202) 906-6518.
Hand Delivery/Courier: 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: OTS-2009-0015.
Instructions: All submissions received must include the
agency name and docket number for this rulemaking. All comments
received will be posted without change, including any personal
information provided. Comments, including attachments and other
supporting materials received are part of the public record and subject
to public disclosure. Do not enclose any information in your comment or
supporting materials that you consider confidential or inappropriate
for public disclosure.
Viewing Comments Electronically: Go to http://www.regulations.gov, under the ``More Search Options'' tab click next
to the ``Advanced Document Search'' option where indicated, select
``Office of Thrift Supervision'' from the agency drop-down menu, then
click ``Submit.'' In the ``Docket ID'' column, select ``OTS-2009-0015''
to view public comments for this notice of proposed rulemaking action.
Viewing Comments On-Site: 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">public.info@ots.treas.gov, or send a facsimile transmission to (202)
906-6518. (Prior notice identifying the materials you will be
requesting will 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 next business day following the date we receive a
request.
FOR FURTHER INFORMATION CONTACT: OCC: Paul Podgorski, Risk Expert,
Capital Policy Division, (202) 874-4755, or Carl Kaminski, Senior
Attorney, 202 874-5405, or Ron Shimabukuro, Senior Counsel, Legislative
and Regulatory Activities Division, (202) 874-5090, Office of the
Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.
Board: Barbara J. Bouchard, Associate Director, (202) 452-3072, or
Anna Lee Hewko, (202) 530-6260, Manager, Supervisory Policy and
Guidance, Division of Banking Supervision and Regulation; or April C.
Snyder, Counsel, (202) 452-3099, or Benjamin W. McDonough, Senior
Attorney, (202) 452-2036, Legal Division. For the hearing impaired
only, Telecommunication Device for the Deaf (TDD), (202) 263-4869.
FDIC: Jim Weinberger, Senior Policy Analyst, (202) 898-7034,
Christine Bouvier, Senior Policy Analyst (Bank Accounting), (202) 898-
7289, Division of Supervision and Consumer Protection; or Mark
Handzlik, Senior Attorney, (202) 898-3990, or Michael Phillips,
Counsel, (202) 898-3581, Supervision Branch, Legal Division.
OTS: Teresa A. Scott, Senior Policy Analyst, (202) 906-6478,
Capital Risk, Christine Smith, Senior Policy Analyst, (202) 906-5740,
Capital Risk, or Marvin Shaw, Senior Attorney, (202) 906-6639,
Legislation and Regulation Division, Office of Thrift Supervision, 1700
G Street, NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Background
The agencies' regulatory capital regime for banking organizations
\1\ incorporates both leverage and risk-based measures. The leverage
measure \2\ uses on-balance sheet assets as the basis for setting
capital requirements that are intended to limit the degree to which a
banking organization can leverage its equity capital base. The risk-
based measures (the general risk-based capital rules \3\ and the
advanced approaches rules) \4\ establish capital requirements intended
to reflect the risks associated with on-balance sheet exposures as well
as off-balance sheet exposures, such as guarantees, commitments, and
derivative transactions. The agencies use generally accepted accounting
principles (GAAP), as established by FASB, as the initial basis for
determining whether an exposure is treated as on- or off-balance sheet
for regulatory capital purposes.
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\1\ Unless otherwise indicated, the term ``banking
organization'' includes banks, savings associations, and bank
holding companies (BHCs).
\2\ 12 CFR part 3 (OCC); 12 CFR part 208, appendix B and 12 CFR
part 225 appendix D (Board); 12 CFR part 325.3 (FDIC); 12 CFR 567.8
(OTS).
\3\ 12 CFR part 3, appendix A (OCC); 12 CFR parts 208 and 225,
appendix A (Board); 12 CFR part 325, appendix A (FDIC); and 12 CFR
part 567, subpart B (OTS). The risk-based capital rules generally do
not apply to bank holding companies with $500 million or less in
consolidated assets.
\4\ 12 CFR part 3, appendix C (OCC); 12 CFR part 208, appendix F
and 12 CFR part 225, appendix G (Board); 12 CFR part 325, appendix D
(FDIC); 12 CFR 567, Appendix C (OTS).
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The GAAP treatment for structured finance transactions using a
special purpose entity (SPE) generally has been governed by the
requirements of Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (FAS 140) and FASB Interpretation No.
46R, Consolidation of Variable Interest Entities (FIN 46(R)).\5\ Under
FAS 140 (as currently in effect), transfers of assets to an entity that
meets the definition of a qualifying special purpose entity (QSPE) are
usually recognized as sales, which permits the transferor to remove the
assets from its balance sheet.\6\ In addition, FIN 46(R) specifically
excludes QSPEs from its scope despite the fact that many QSPEs would
have otherwise been deemed variable interest entities (VIEs) subject to
FIN 46(R) and possible consolidation.
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\5\ Statement of Financial Accounting Standards No. 140 (FASB
2000) and Interpretation No. 46R (FASB 2003). All references made to
FASB Statements of Financial Accounting Standards and
Interpretations have been or will soon be included in the FASB
Accounting Standards Codification that became effective on July 1,
2009.
\6\ The transfers are recognized as sales as long as they meet
other criteria contained in the 2000 version of FAS 140, as amended.
See FAS 140, paragraph 9.
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On June 12, 2009, FASB finalized modifications to FAS 140 and FIN
46(R) (the 2009 GAAP modifications) through Statement of Financial
Accounting Standards No. 166, Accounting for Transfers of Financial
Assets, an Amendment of FASB Statement No. 140 (FAS 166), and Statement
of Financial Accounting Standards No. 167, Amendments to FASB
Interpretation No. 46(R) (FAS 167). FAS 166 and FAS 167 are effective
as of the beginning of a banking organization's first annual financial
statement reporting period that begins after November 15, 2009,
including interim periods therein, and for interim and annual periods
thereafter.\7\
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\7\ See relevant provisions in FAS 166 paragraphs 5-7 and FAS
167 paragraphs 7-10.
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As discussed in further detail below, the 2009 GAAP modifications,
among other things, remove the concept of a QSPE from GAAP and alter
the consolidation analysis for VIEs, thereby subjecting many VIEs that
are not consolidated under current GAAP standards to consolidation
requirements. These changes will require some banking organizations to
consolidate the assets, liabilities, and equity of certain VIEs onto
their balance sheets for financial and regulatory reporting purposes.
II. The 2009 GAAP Modifications
Under FAS 167, a VIE is an entity whose equity investment at risk
is insufficient to permit the entity to finance its activities without
additional subordinated financial support (for
[[Page 47141]]
example, an entity with nominal common equity) and/or whose equity
investors do not have rights or obligations with respect to the entity
typical of equity investors. For example, a VIE generally exists when
the administrators of an entity hold a nominal common equity interest,
and debt holders hold the rest of the economic interests in the entity
(which frequently are issued in various degrees of subordination).
Similarly, an entity is a VIE if its equity holders, as a group, lack
the right to make decisions about the entity's activities; the
obligation to absorb the expected losses of the entity, or the right to
receive the expected residual returns of the entity.\8\ Thus, for
example, an entity whose debt holders, rather than its common equity
holders, have all essential voting rights and the rights to receive all
revenue generated by the entity's assets, generally would be a VIE.
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\8\ FAS 167, appendix D, paragraphs 5 and 6.
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Determining whether a specific company is required to consolidate a
VIE under FAS 167 depends on a qualitative analysis of whether that
company has a ``controlling financial interest'' in the VIE. The
analysis focuses on the company's power over and interest in the VIE,
rather than on quantitative equity ownership thresholds. A company has
a controlling financial interest in a VIE if it has (1) the power to
direct matters that most significantly impact the activities of the
VIE, including, but not limited to, activities that impact the VIE's
economic performance (for example, servicing activities); and (2)
either the obligation to absorb losses of the VIE that potentially
could be significant to the VIE, or the right to receive benefits from
the VIE that potentially could be significant to the VIE, or both.\9\
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\9\ See FAS 167, appendix D, paragraphs 14 and 14A-14G.
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A company's analysis of whether it must consolidate a VIE must
incorporate the above criteria and take into account the company's
interest(s) in the VIE and the characteristics of the VIE, including
the involvement of other VIE interest holders.\10\ FAS 167 also
requires a company to conduct ongoing assessments using the above
criteria to determine whether a VIE is subject to consolidation.\11\
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\10\ See FAS 167, appendix D, paragraphs 14C-14E. If a company
determines that power is shared among multiple parties so that no
one party is deemed to have a controlling financial interest, it is
not required to consolidate the VIE. FAS 167, appendix D, paragraph
14D. It is expected that some VIEs will not be consolidated by any
company.
\11\ See FAS 167 p. ii.
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FAS 166 amends FAS 140 by removing the QSPE concept from GAAP,
strengthening the requirements for recognizing the transfer of
financial assets to a third party, and requiring companies to make
additional disclosures about any continuing involvement they may have
in financial assets that they transfer.\12\ As a result, a company that
transferred financial assets to an SPE that previously met the
definition of a QSPE must now evaluate whether it must consolidate the
assets, liabilities, and equity of the SPE pursuant to FAS 167.
Furthermore, under the additional disclosure requirements in FAS 166,
companies must detail in their financial statements their continuing
involvement--through recourse or guarantee arrangements, servicing
arrangements, or other relationships--in any financial assets that they
transfer to an SPE (whether or not a company is required to consolidate
the SPE following the transfer). These disclosure requirements apply as
long as a transferring company is involved in financial assets that it
has transferred.\13\
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\12\ See FAS 166, appendix D, paragraphs 16A-17.
\13\ See FAS 166, appendix D, paragraph 16D. FAS 166 also
requires companies to provide periodically additional information
about gains and losses resulting from transfers of financial assets.
See id., paragraph 17.
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The 2009 GAAP modifications do not provide for the grandfathering
of existing financial structures. Most banking organizations that will
be required to consolidate and recognize on their balance sheets many
previously unconsolidated VIEs due to the 2009 GAAP modifications will
consolidate as of January 1, 2010.\14\ These newly consolidated
entities will therefore be included in relevant regulatory reports of
banking organizations, such as the bank Reports of Condition and Income
(Call Reports), the Thrift Financial Report (TFR), and the bank holding
company financial statements (FR Y-9C Report). A preliminary analysis
of the 2009 GAAP modifications, as well as analysis derived from the
agencies' supervisory information, indicates that the categories of
off-balance sheet exposures likely to be subject to consolidation on an
originating or servicing banking organization's balance sheet include:
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\14\ It is anticipated that most banking organizations affected
by the 2009 GAAP modifications have annual reporting periods
starting on January 1 and will implement the new standards on
January 1, 2010. However, some banking organizations use different
annual reporting periods and will implement the new standards at the
beginning of their first fiscal year that starts after November 15,
2009.
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Certain asset-backed commercial paper (ABCP) conduits;
Revolving securitizations structured as master trusts,
including credit card and home equity line of credit (HELOC)
securitizations;
Certain mortgage loan securitizations not guaranteed by
the U.S. government or a U.S. government-sponsored agency;
Certain term loan securitizations in which a banking
organization retains a residual interest and servicing rights,
including some student loan and automobile loan securitizations; and
Other SPEs, such as certain tender option bond trusts that
were designed as QSPEs.
The 2009 GAAP modifications may also require banking organizations to
recognize on their balance sheets certain loan participations and other
exposures not related to asset securitization. In addition, banking
organizations may need to establish loan loss reserves \15\ to cover
incurred losses on the assets consolidated pursuant to the 2009 GAAP
modifications. Each banking organization must determine which
structures and exposures must be consolidated onto its balance sheet,
and assess other appropriate adjustments to relevant financial reports,
as a result of the 2009 GAAP modifications.
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\15\ Under GAAP, an allowance for loan and lease losses (ALLL)
should be recognized when events have occurred indicating that it is
probable that an asset has been impaired or that a liability has
been incurred as of the balance sheet date and that the amount of
the loss can be reasonably estimated. Under the risk-based capital
rules, the ALLL is a component of tier 2 capital and, therefore,
included in the numerator of the total risk-based capital ratio.
However, the amount of ALLL that may be included in tier 2 capital
is limited to 1.25 percentage points of gross risk-weighted assets.
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Question 1: Which types of VIEs will banking organizations have to
consolidate onto their balance sheets due to the 2009 GAAP
modifications, which types are not expected to be subject to
consolidation, and why? Which types are likely to be restructured to
avoid consolidation?
III. Regulatory Capital and the 2009 GAAP Modifications
The agencies' capital standards generally use GAAP treatment of an
exposure as a starting point for assessing regulatory capital
requirements for that exposure. For example, if certain assets of a
banking organization are transferred to a VIE through a secured
financing but remain on the banking organization's balance sheet under
GAAP, the VIE's assets are risk-weighted like other consolidated
assets. However, if the assets are securitized through sale to a VIE
that the banking organization does not consolidate under GAAP,
generally the banking organization is required to
[[Page 47142]]
hold risk-based capital only against its contractual exposures to the
VIE.\16\ The contractual exposures may take the form of on-balance
sheet exposures such as asset-backed securities and residual interests,
and off-balance sheet exposures such as liquidity facilities. The 2009
GAAP modifications generally would increase the amount of exposures
recognized on banking organizations' balance sheets. Accordingly, under
the agencies' current regulatory capital requirements, the 2009 GAAP
modifications generally would result in higher regulatory capital
requirements for those banking organizations that must consolidate
VIEs.
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\16\ 12 CFR part 3, appendix A, Sec. 4 (OCC); 12 CFR parts 208
and 225, appendix A Sec. III (Board); 12 CFR part 325, appendix A,
Sec. II (FDIC); 12 CFR 567.6.
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Under the agencies' leverage capital requirements, tier 1 capital
is assessed against a measure of a banking organization's total assets,
net of the ALLL and certain other exposures.\17\ Therefore, previously
unconsolidated assets that now must be recognized on a banking
organization's balance sheet due to the 2009 GAAP modifications will
increase the denominator of the banking organization's leverage ratio.
Although the 2009 GAAP modifications will also affect the numerator of
the risk-based and leverage capital ratios, in many cases both the
risk-based and leverage capital ratios of affected banking
organizations will decrease following implementation of the 2009 GAAP
modifications.
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\17\ See 12 CFR 3.2(a) (OCC); 12 CFR part 208, appendix B Sec.
II.b and 12 CFR part 225, appendix D, Sec. II.b (Board); 12 CFR
325.2(m) (FDIC); 12 CFR 567.5(b)(4) (OTS).
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The risk-based capital rules specify the components of regulatory
capital and recognize variations of risk levels among different
exposures through different risk-weight assignments. Although for many
years the agencies have used financial information reported under GAAP
as the starting point for banking organizations' regulatory reporting
requirements,\18\ the risk-based capital rules adjust GAAP balance
sheet inputs where appropriate to capture an exposure's risk or the
ability of elements of capital to absorb loss.\19\
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\18\ Although Federal law requires that the accounting
principles applicable to bank ``reports or statements'' be
consistent with, or no less stringent than GAAP, it does not require
the Federal banking agencies to adhere to GAAP when determining
compliance with regulatory capital requirements. See 12 U.S.C.
1831n(a)(2) and 12 U.S.C. 1831n(b).
\19\ A notable example where the risk-based capital rules differ
from GAAP is in the requirement that banking organizations hold
capital against the contingent risk of a number of off-balance sheet
exposures, such as loan commitments and letters of credit, as well
as against the counterparty credit risk of derivatives. As a further
example, while GAAP includes goodwill and intangibles in total
stockholders' equity, certain of these items are deducted from
stockholders' equity when calculating regulatory capital. See 12 CFR
part 3, appendix A, Sec. 2(c) (OCC); 12 CFR parts 208 and 225,
appendix A, Sec. Sec. II and III.A (Board); 12 CFR part 325,
appendix A, Sec. Sec. I. and II.D. (FDIC); 12 CFR 567.5(a)(1)(v)
and 567.5(a)(2) (OTS).
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In their consideration of the 2009 GAAP modifications and the
interaction of the modifications with the regulatory capital
requirements, the agencies have determined that the qualitative
analysis required under FAS 167, as well as enhanced requirements for
recognizing transfers of financial assets under FAS 166, converge in
many respects with the agencies' assessment of a banking organization's
risk exposure to a structured finance transaction and other
transactions affected by the 2009 GAAP modifications.
In the case of some structures that banking organizations were not
required to consolidate prior to the 2009 GAAP modifications, the
recent turmoil in the financial markets has demonstrated the extent to
which the credit risk exposure of the sponsoring banking organization
to such structures (and their related assets) has in fact been greater
than the agencies estimated, and more associated with non-contractual
considerations than the agencies had expected. For example, recent
performance data on structures involving revolving assets \20\ show
that banking organizations have often provided non-contractual
(implicit) support to prevent senior securities of the structure from
being downgraded, thereby mitigating reputational risk and the
associated alienation of investors, and preserving access to cost-
effective funding.
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\20\ Typical structures of this type include securitizations
that are backed by credit card or HELOC receivables, single and
multi-seller ABCP conduits, and structured investment vehicles.
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In light of this recent experience, the agencies believe that the
broader accounting consolidation requirements implemented by the 2009
GAAP modifications will result in a regulatory capital treatment that
more appropriately reflects the risks to which banking organizations
are exposed. Additionally, the 2009 GAAP modifications require that a
banking organization regularly update its consolidation analysis with
respect to VIEs, and the enhanced requirements for recognition of asset
transfers and ongoing disclosure requirements for financial assets with
which the banking organization maintains some relationship. These
requirements are consistent with the agencies' view that the capital
treatment of some previously unconsolidated VIEs does not reflect the
actual risk to which the banking organization may be exposed.
Question 2: Are there features and characteristics of
securitization transactions or other transactions with VIEs, other
SPEs, or other entities that are more or less likely to elicit banking
organizations' provision of non-contractual (implicit) support under
stressed or other circumstances due to reputational risk, business
model, or other reasons? Commenters should describe such features and
characteristics and the methods of support that may be provided. The
agencies are particularly interested in comments regarding credit card
securitizations, structured investment vehicles, money market funds,
hedge funds, and other entities that are likely beneficiaries of non-
contractual support.
The banking agencies have carefully considered the probable effect
on banking organizations' regulatory capital ratios that will result
from the 2009 GAAP modifications and the possible alignments between
these effects and the risk-based principles of the risk-based capital
rules. The agencies have also carefully considered the potential
financial impact of the 2009 GAAP modifications on banking
organizations. As part of this consideration, the agencies reviewed
relevant data from banking organizations' public financial filings and
regulatory reports as well as information obtained from the supervisory
process, including the results of the Supervisory Capital Assessment
Program (SCAP). The SCAP evaluated the capital position of the nineteen
largest U.S. banking organizations, which are also the banking
organizations most involved in asset securitization. As part of the
SCAP, participating banking organizations' capital adequacy was
assessed using consolidation assumptions consistent with standards
ultimately included in FAS 166 and FAS 167.\21\
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\21\ A description of the design and implementation of the SCAP
can be found at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090424a1.pdf. Additionally, an overview of the results
of the SCAP, including regulatory capital ratios calculated pro
forma assuming implementation of the 2009 GAAP modifications, can be
accessed at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf.
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Having considered this information, including the SCAP results, the
agencies do not, at this time, find that a compelling basis exists for
modifying their regulatory capital requirements to alter the effect of
the 2009 GAAP modifications on banking organizations' minimum
regulatory capital
[[Page 47143]]
requirements. Furthermore, as discussed above, the banking agencies
believe that the capital treatment of many exposures that would be
consolidated under the new accounting standards aligns with risk-based
capital principles and results in more appropriate risk-based capital
charges. The agencies also believe that it is most appropriate for the
leverage ratio to continue to reflect the total on-balance sheet assets
of a banking organization, in keeping with its role as a supplement to
the risk-based capital measure that limits the maximum degree to which
a banking organization can leverage its equity capital base.\22\
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\22\ 12 CFR 3.6(b) and (c) (OCC); 12 CFR part 208, appendix B,
Sec. I.a. and 12 CFR part 225, appendix D, Sec. I.a (Board); 12
CFR part 325, appendix B (FDIC); 12 CFR 567.5 (OTS).
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Question 3: What effect will the 2009 GAAP modifications have on
banking organizations' financial positions, lending, and activities?
How will the modifications impact lending typically financed by
securitization and lending in general? How may the modifications affect
the financial markets? What proportion of the impact is related to
regulatory capital requirements? Commenters should provide specific
responses and supporting data.
Question 4: As is generally the case with respect to changes in
accounting rules, the 2009 GAAP modifications would immediately affect
banking organizations' capital requirements. The agencies specifically
request comment on the impact of immediate application of the 2009 GAAP
modifications on the regulatory capital requirements of banking
organizations that were not included in the SCAP. In light of the
potential impact at this point in the economic cycle of the 2009 GAAP
modifications on regulatory capital requirements, the agencies solicit
comment on whether there are significant costs and burdens (or
benefits) associated with immediate application of the 2009 GAAP
modifications to regulatory capital requirements. If there are
significant costs and burdens, or other relevant considerations, should
the agencies consider a phase-in of the capital requirements that would
result from the 2009 GAAP modifications? Commenters should provide
specific and detailed rationales and supporting evidence and data to
support their positions.
Additionally, if a phase-in of the impact of the GAAP modifications
is appropriate, what type of phase-in should be considered? For
example, would a phase-in over the course of a four-quarter period, as
described below, for transactions entered into on or prior to December
31, 2009, reduce costs or burdens without reducing benefits?
Under a four-quarter phase-in approach, the amount of a newly-
consolidated VIE's assets that would be subject to the phase-in would
be limited to the aggregate value of the assets held by the entity as
of the last day of the fiscal year prior to its implementation of the
2009 GAAP modifications. For most banking organizations, the aggregate
value would be calculated as of December 31, 2009.
During such a phase-in, banking organizations would be required to
hold capital (for purposes of calculating both the leverage and risk-
based capital ratios) incrementally against 25 percent of exposures
subject to consolidation due to the 2009 GAAP modifications for each of
the first three quarters of 2010, and against 100 percent of the
exposures thereafter. For example, if, as a result of the 2009 GAAP
modifications, a banking organization would have to consolidate $10
billion of assets associated with transactions entered into on or
before December 31, 2009, it would be required to include $2.5 billion
of these assets in its regulatory capital ratios the first quarter
2010, $5 billion the second, $7.5 billion the third, and the full $10
billion of assets in the fourth quarter and future reporting periods.
During such a phase-in period, the amount of capital that an
institution holds against all of its exposures to a single VIE as of
December 31, 2009, would not be reduced as a result of this phase-in.
For example, if a banking organization is effectively required to hold
risk-based capital against all exposures in a VIE due to a provision of
implicit recourse, that capital treatment would continue throughout
2010. For another example, if in the first quarter of the phase-in the
amount of capital required for a banking organization's credit
enhancements to a securitization on December 31, 2009, exceeds the
amount of capital required for 25 percent (the first quarter phase-in
amount) of the newly consolidated underlying assets, the banking
organization would be required to hold the greater amount of capital.
Regulatory capital rules establish only a minimum capital
requirement. In all cases, banking organizations should hold capital
commensurate with the level and nature of the risks to which they are
exposed. Supervisors will review a banking organization's
securitization and other structured finance activities on an individual
transaction and business-line basis, and may require a banking
organization to increase its capital if they conclude that its capital
position is not commensurate with its risk.\23\
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\23\ 12 CFR part 3.4(b) (OCC); 12 CFR parts 208 and 225,
appendix A Sec. I (Board); 12 CFR part 325, appendix A Sec. IIA
(FDIC); 12 CFR 567.11 (OTS).
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IV. Asset-Backed Commercial Paper Programs
The agencies propose to eliminate existing provisions in the risk-
based capital rules that permit a banking organization, if it is
required to consolidate under GAAP an ABCP program that it sponsors, to
exclude the consolidated ABCP program assets from risk-weighted assets
and instead assess the risk-based capital requirement against any
contractual exposures of the organization arising from such ABCP
programs.\24\ The agencies also propose to eliminate the associated
provision in the general risk-based capital rules (incorporated by
reference in the advanced approaches) that excludes from tier 1 capital
the minority interest in a consolidated ABCP program not included in a
banking organization's risk-weighted assets.\25\
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\24\ 12 CFR part 3, appendix A, Sec. 3(a)(5) and 12 CFR part 3,
appendix C Sec. 42(l) (OCC); 12 CFR part 208, appendix A, Sec.
III.B.6.b and appendix F Sec. 42(l) and 12 CFR part 225, appendix
A, Sec. III.B.6.b and appendix G Sec. 42(l) (Board); 12 CFR part
325, appendix A, Sec. II.B.6.b and 12 CFR part 325, appendix D,
Sec. 424(l) (FDIC); 12 CFR 567.6(a)(2)(vi)(E) and 12 CFR part 567,
appendix C, Sec. 42(l) (OTS).
\25\ 12 CFR part 3, appendix A, Sec. 2(a)(3)(ii) (OCC); 12 CFR
parts 208 and 225, appendix A, Sec. II A.1.c (Board); 12 CFR part
325, appendix A, Sec. I.A.1.(d) (FDIC); 12 CFR 567.5(a)(iii)(OTS).
See 12 CFR part 3, appendix C Sec. 11(a) (OCC); 12 CFR part 208,
appendix F, Sec. 11(a) and 12 CFR part 225, appendix G, Sec. 11(a)
(Board); 12 CFR part 325, appendix D, Sec. 11(a) (FDIC); 12 CFR
part 567, appendix C, Sec. 11(a) (OTS).
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The agencies initially implemented these provisions in the general
risk-based capital rules in 2004 in response to changes in GAAP that
required consolidation of certain ABCP conduits by sponsors. The
provisions were driven largely by the agencies' belief at the time that
banking organizations sponsoring ABCP conduits generally faced limited
risk exposures to ABCP programs, because these exposures generally were
confined to the credit enhancements and liquidity facility arrangements
banking organizations provide to these programs.\26\
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\26\ See 69 FR 44908 (July 28, 2004).
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Additionally, the agencies believed previously that operational
controls and structural provisions, as well as over-collateralization
or other credit enhancements provided by the companies that sell assets
into ABCP programs, could further mitigate the risk to which sponsoring
banking organizations were exposed. However, in light of the increased
incidence of
[[Page 47144]]
banking organizations providing non-contractual support to these
programs, as well as the general credit risk concerns discussed above,
the agencies have reconsidered the appropriateness of excluding
consolidated ABCP program assets from risk-weighted assets and have
determined that continuing the exclusion is no longer justified. Under
the proposal, if a banking organization is required to consolidate an
entity associated with an ABCP program under GAAP, it must hold
regulatory capital against the assets of the entity. It would not be
permitted to calculate its risk-based capital requirements with respect
to the entity based on its contractual exposure to the entity.
V. Reservation of Authority
The agencies expect that there may be instances when a banking
organization structures a financial transaction with an SPE to avoid
consolidation under FAS 166 and FAS 167, and the resulting capital
treatment is not commensurate with the actual risk relationship of the
banking organization to the entity. Under this proposal, the banking
organization's primary Federal supervisor would retain the authority to
require the banking organization to treat the entity as if it were
consolidated onto the banking organization's balance sheet for risk-
based capital purposes.
Question 5: The agencies request comment on all aspects of this
proposed rule, including the proposal to remove the exclusion of
consolidated ABCP program assets from risk-weighted assets under the
risk-based capital rules, the proposed reservation of authority
provisions, and the regulatory capital treatment that would result from
the 2009 GAAP modifications absent changes to the agencies' regulatory
capital requirements.
Question 6: Does this proposal raise competitive equity concerns
with respect to accounting and regulatory capital treatments in other
jurisdictions or with respect to international accounting standards?
Although the agencies believe that GAAP, as modified, should remain
the starting point for calculating regulatory capital ratios and that
the capital requirements resulting from the 2009 GAAP modifications
generally will result in a more appropriate reflection of credit risk,
the agencies recognize that the principles underlying the 2009 GAAP
modifications--power, benefits, and obligation to bear losses--and the
resulting consolidation treatment, may not in all situations and
respects correspond to a treatment that would result from a more pure
risk focus.
Question 7: Among the structures that likely will be consolidated
under the 2009 GAAP modifications, for which types, if any, should the
agencies consider assessing a different risk-based capital requirement
than the capital treatment that will result from the implementation of
the modifications? How are commenters' views influenced by proposals
for reforming the securitization markets that require securitizers to
retain a percentage of the credit risk on any asset that is
transferred, sold or conveyed through a securitization? Commenters
should provide a detailed explanation and supporting empirical analysis
of why the features and characteristics of these structure types merit
an alternative treatment, how the risks of the structures should be
measured, and what an appropriate alternative capital treatment would
be. Responses should also discuss in detail with supporting evidence
how such different capital treatment may or may not give rise to
capital arbitrage opportunities.
Question 8: Servicers of securitized residential mortgages who
participate in the Treasury's Making Home Affordable Program (MHAP)
receive certain incentive payments in connection with loans modified
under the program. If a structure must be consolidated solely due to
loan modifications under MHAP, should these assets be included in the
leverage and risk-based capital requirements? Commenters should specify
the rationale for an alternative treatment and what an appropriate
alternative capital requirement would be.
Question 9: Which features and characteristics of transactions that
may not be subject to consolidation after the 2009 GAAP modifications
become effective should be subject to risk-based capital requirements
as if consolidated in order to more appropriately reflect risk?
Question 10: Will securitized loans that remain on the balance
sheet be subjected to the same ALLL provisioning process, including
comparable loss rates, as similar loans that are not securitized? If
the answer is no, please explain. If the answer is yes, how would
banking organizations reflect the benefits of risk sharing if investors
in securitized, on-balance sheet loans absorb realized credit losses?
Commenters should provide quantification of such benefits, and any
other effects of loss sharing, wherever possible. Additionally, are
there policy alternatives to address any unique challenges the pending
change in accounting standards present with regard to the ALLL
provisioning process including, for example, the current constraint on
the amount of provisions that are includible in tier 2 capital?
Commenters should provide quantification of the effects of the current
limits on the includibility of provisions in tier 2 capital and the
extent to which the 2009 GAAP modifications and the changes in
regulatory capital requirements proposed in this NPR affect those
limits.
VI. Regulatory Analysis
Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA),
generally requires that, in connection with a notice of proposed
rulemaking, an agency prepare and make available for public comment an
initial regulatory flexibility analysis that describes the impact of a
proposed rule on small entities.\27\ Under regulations issued by the
Small Business Administration,\28\ a small entity includes a commercial
bank, bank holding company, or savings association with assets of $175
million or less (a small banking organization). As of June 30, 2009,
there were approximately 2,533 small bank holding companies, 385 small
savings associations, 749 small national banks, 432 small State member
banks, and 3,040 small State nonmember banks. As a general matter, the
Board's general risk-based capital rules apply only to a bank holding
company that has consolidated assets of $500 million or more.
Therefore, the proposed changes to the Board's capital adequacy
guidelines for bank holding companies will not affect small bank
holding companies.
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\27\ See 5 U.S.C. 603(a).
\28\ See 13 CFR 121.201.
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Other than the proposed modifications to the risk-based capital
rules that would no longer allow banking organizations to exclude
consolidated ABCP programs from risk-weighted assets, the proposed rule
does not impose any additional obligations, restrictions, burdens, or
reporting, recordkeeping or compliance requirements on banks or savings
associations, including small banking organizations, nor does it
duplicate, overlap or conflict with other Federal rules. The agencies
expect that the proposed modifications to the general risk-based
capital rules would not materially affect small banking organizations
because they do not sponsor ABCP programs.
Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995
[[Page 47145]]
(44 U.S.C. 3506), the agencies have reviewed the proposed rule. The
Board reviewed the proposed rule under the authority delegated to the
Board by the Office of Management and Budget. The agencies note that
instructions related to ABCP conduits in schedule RC-R of the
Consolidated Reports of Condition and Income (OMB Nos. 7100-0036, 1557-
0081, and 3064-0052; FFIEC 031 and 041) and schedule HC-R of the
Consolidated Financial Statements for Bank Holding Companies (OMB No.
7100-0128; FR Y-9C) would need to be revised under the proposal. The
agencies, however, do not believe that there would be any additional
burden associated with these instructional changes as they would be in
accordance with GAAP.
OCC/OTS Executive Order 12866
Executive Order 12866 requires Federal agencies to prepare a
regulatory impact analysis for agency actions that are found to be
``significant regulatory actions.'' Significant regulatory actions
include, among other things, rulemakings that ``have an annual effect
on the economy of $100 million or more or adversely affect in a
material way the economy, a sector of the economy, productivity,
competition, jobs, the environment, public health or safety, or State,
local, or Tribal governments or communities.'' The OCC and the OTS each
determined that its portion of the proposed rule is not a significant
regulatory action under Executive Order 12866.
OCC/OTS Unfunded Mandates Reform Act of 1995 Determination
The Unfunded Mandates Reform Act of 1995 \29\ (UMRA) requires that
an agency prepare a budgetary impact statement before promulgating a
rule that includes a Federal mandate that may result in the expenditure
by State, local, and Tribal governments, in the aggregate, or by the
private sector of $100 million or more (adjusted annually for
inflation) in any one year. If a budgetary impact statement is
required, section 205 of the UMRA also requires an agency to identify
and consider a reasonable number of regulatory alternatives before
promulgating a rule. The OCC and the OTS each have determined that its
proposed rule will not result in expenditures by State, local, and
Tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. Accordingly, neither the OCC nor the
OTS has prepared a budgetary impact statement or specifically addressed
the regulatory alternatives considered.
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\29\ See Public Law 104-4.
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Solicitation of Comments on Use of Plain Language
Section 722 of the GLBA required the agencies to use plain language
in all proposed and final rules published after January 1, 2000. The
agencies invite comment on how to make this proposed rule easier to
understand. For example:
Have the agencies organized the material to suit your
needs? If not, how could they present the rule more clearly?
Are the requirements in the rule clearly stated? If not,
how could the rule be more clearly stated?
Do the regulations contain technical language or jargon
that is not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes would achieve that?
Is this section format adequate? If not, which of the
sections should be changed and how?
What other changes can the agencies incorporate to make
the regulation easier to understand?
List of Subjects
12 CFR Part 3
Administrative practice and procedure, Banks, Banking, Capital,
National banks, Reporting and recordkeeping requirements, Risk.
12 CFR Part 208
Confidential business information, Crime, Currency, Federal Reserve
System, Mortgages, Reporting and recordkeeping requirements, Risk.
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, Banks, banking, Capital
adequacy, Reporting and recordkeeping requirements, Savings
associations, State nonmember banks.
12 CFR Part 567
Capital, Reporting and recordkeeping requirements, Risk, Savings
associations.
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons stated in the common preamble, the Office of the
Comptroller of the Currency proposes to amend Part 3 of chapter I of
Title 12, Code of Federal Regulations as follows:
PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n
note, 1835, 3907, and 3909.
2. Section 3.4 is amended by adding paragraph (c) to read as
follows:
Sec. 3.4 Reservation of authority.
* * * * *
(c) The OCC may find that that the capital treatment for an
exposure not subject to consolidation on the bank's balance sheet does
not appropriately reflect the risks imposed on the bank. Accordingly,
the OCC may require the bank to treat the exposure as if it were
consolidated onto the bank's balance sheet for the purpose of
determining compliance with the bank's minimum risk-based capital
requirements set forth in Appendix A or Appendix C to this Part. The
OCC will look to the substance of and risk associated with the
transaction as well as other relevant factors the OCC deems appropriate
in determining whether to require such treatment and in determining the
bank's compliance with minimum risk-based capital requirements.
3. In appendix A to Part 3:
A. In section 2, remove and reserve paragraph (a)(3)(ii),
B. In section 3, remove and reserve paragraph (a)(5),
C. Revise paragraph (a)(6).
The revision reads as follows:
Appendix A to Part 3--Risk Based Capital Guidelines
* * * * *
Section 3. * * *
* * * * *
(a) * * *
(6) 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 sections 3(a) and 4 of this appendix A. Any direct credit
substitutes and recourse obligations (including residual
[[Page 47146]]
interests), and loans that a bank may provide to such a variable
interest entity are not subject to any capital charge under section
4 of this appendix A.
4. In appendix C to Part 3:
A. In section 1, redesignate paragraph (c)(3) as paragraph (c)(4),
B. Add a new paragraph (c)(3),
C. Remove section 42(l) and redesignate section 42(m) as section
42(l)
The additions and revisions read as follows:
Appendix C to Part 3--Capital Adequacy Guidelines for Banks: Internal-
Ratings-Based and Advanced Measurement Approaches
* * * * *
Section 1. * * *
(c) * * *
(3) Regulatory capital treatment of unconsolidated entities. If
the OCC determines that the capital treatment for a banking
organization's exposure or other relationship to an entity not
consolidated on the bank's balance sheet is not commensurate with
the actual risk relationship of the banking organization to the
entity, for risk-based capital purposes, it may require the banking
organization to treat the entity as if it were consolidated onto the
bank's balance sheet and require the bank to hold capital against
the entity's exposures. The OCC will look to the substance of and
risk associated with the transaction as well as other relevant
factors the OCC deems appropriate in determining whether to require
such treatment and in determining the bank's compliance with minimum
risk-based capital requirements. In making a determination under
this paragraph, the OCC will apply notice and response procedures in
the same manner and to the same extent as the notice and response
procedures in 12 CFR 3.12.
* * * * *
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons stated in the common preamble, the Board of
Governors of Federal Reserve System amends parts 208 and 225 of Chapter
II of title 12 of the Code of Federal Regulations as follows:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
5. The authority 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), 1833(j),
1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x 1835a, 1882,
2901-2907, 3105, 3310, 3331-3351, and 3905-3909; 15 U.S.C. 78b,
78I(b), 78l(i),780-4(c)(5), 78q, 78q-1, and 78w, 1681s, 1681w, 6801,
and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106 and
4128.
6. In appendix A to part 208:
A. Amend section I by adding a new paragraph immediately prior to
the last undesignated paragraph,
B. Amend paragraph (c) of section II.A.1 by removing the last
sentence,
C. Remove paragraph (b) of section III.B.6 and redesignate
paragraph (c) of section III.B.6 as paragraph (b).
The addition reads as follows:
Appendix A to Part 208--Capital Adequacy Guidelines for State Member
Banks: Risk-Based Measure
I. * * *
If the Federal Reserve determines that the capital treatment for
a bank's exposure or other relationship to an entity not
consolidated on the bank's balance sheet is not commensurate with
the actual risk relationship of the bank to the entity, for risk-
based capital purposes, it may require the bank to treat the entity
as if it were consolidated onto the bank's balance sheet and require
the bank to hold capital against the entity's exposures.
* * * * *
7. In appendix F to part 208:
A. Redesignate paragraph (c)(3) as (c)(4) and add a new paragraph
(c)(3);
B. Remove section 42(l) and redesignate section 42(m) as section
42(l).
The addition reads as follows:
Appendix F to Part 208--Capital Adequacy Guidelines for Banks:
Internal-Ratings-Based and Advanced Measurement Approaches
* * * * *
Section 1. * * *
(c) * * *
(3) Regulatory capital treatment of unconsolidated entities. If
the Federal Reserve determines that the capital treatment for a
bank's exposure or other relationship to an entity not consolidated
on the bank's balance sheet is not commensurate with the actual risk
relationship of the bank to the entity, for risk-based capital
purposes, it may require the bank to treat the entity as if it were
consolidated onto the bank's balance sheet and require the bank to
hold capital against the entity's exposures.
* * * * *
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
8. The authority 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. 1681s, 1681w, 6801 and 6805.
9. In appendix A to part 225,
A. Amend section I by adding the following paragraph immediately
prior to the last undesignated paragraph,
B. Amend paragraph (iii) of section II.A.1.c by removing the last
sentence,
C. Remove paragraph (b) of section III.B.6 and redesignate
paragraph (c) of section III.B.6 as paragraph (b).
Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure
I. * * *
If the Federal Reserve determines that the capital treatment for
a banking organization's exposure or other relationship to an entity
not consolidated on the banking organization's balance sheet is not
commensurate with the actual risk relationship of the banking
organization to the entity, for risk-based capital purposes, it may
require the banking organization to treat the entity as if it were
consolidated onto the banking organization's balance sheet and
require the banking organization to hold capital against the
entity's exposures.
* * * * *
10. In appendix G to part 225,
A. In section 1, redesignate paragraph (c)(3) as paragraph (c)(4)
and add a new paragraph (c)(3),
B. Remove section 42(l) and redesignate section 42(m) as section
42(l).
The added text will read as follows:
Appendix F to Part 208--Capital Adequacy Guidelines for Banks:
Internal-Ratings-Based and Advanced Measurement Approaches
* * * * *
1. * * *
(c) * * *
(3) Regulatory capital treatment of unconsolidated entities. If
the Federal Reserve determines that the capital treatment for a
banking organization's exposure or other relationship to an entity
not consolidated on the banking organization's balance sheet is not
commensurate with the actual risk relationship of the banking
organization to the entity, for risk-based capital purposes, it may
require the banking organization to treat the entity as if it were
consolidated onto the banking organization's balance sheet and
require the banking organization to hold capital against the
entity's exposures.
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority for Issuance
For the reasons stated in the common preamble, the Federal Deposit
Insurance Corporation amends Part 325 of Chapter III of Title 12, Code
of the Federal Regulations as follows:
PART 325--CAPITAL MAINTENANCE
11. The authority citation for part 325 continues to read as
follows:
[[Page 47147]]
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, 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).
12. In Appendix A to part 325,
A. Revise section I.A.1.(d);
B. Amend section II.A. by adding a new paragraph 4;
C. Remove section II.B.6.b. and redesignate section II.B.6.c. as
section II.B.6.b.
The added text to read as follows:
Appendix A to Part 325--Statement of Policy on Risk Based Capital
* * * * *
I. * * *
A. * * *
1. * * * * *
(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 non-financial 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.
* * * * *
II. * * *
A. * * * * *
4. The Director of the Division of Supervision and Consumer
Protection (DSC) may, on a case-by-case basis, determine that the
regulatory capital treatment for an exposure to a transaction that
is not subject to consolidation on the balance sheet is not
commensurate with the risk of the exposure and the relationship of
the bank to the transaction. In making this determination, the
Director of DSC may require the bank to treat the transaction as if
it were consolidated on the balance sheet of the bank for regulatory
capital purposes and calculate the appropriate regulatory capital
ratios accordingly.
* * * * *
13. In Appendix D to part 325,
A. Amend section 1(c) by redesignating paragraph (c)(3) as
paragraph (c)(4) and adding a new paragraph (c)(3);
B. Remove section 42(l) and redesignate section 42(m) as section
42(l)
The added text should read as follows:
Appendix D to Part 325--Capital Adequacy Guidelines for Banks:
Internal-Ratings-Based and Advanced Measurement Approaches
* * * * *
Section 1. * * *
(c) * * *
(3) The FDIC may, on a case-by-case basis, determine that the
regulatory capital treatment for an exposure to a transaction that
is not subject to consolidation on the balance sheet is not
commensurate with the risk of the exposure and the relationship of
the bank to the transaction. In making this determination, the FDIC
may require the bank to treat the transaction as if it were
consolidated on the balance sheet of the bank for regulatory capital
purposes and calculate the appropriate regulatory capital ratios
accordingly.
* * * * *
Department of the Treasury
Office of Thrift Supervision
12 CFR Chapter V
For reasons set forth in the common preamble, the Office of Thrift
Supervision amends part 567 of Chapter V of title 12 of the Code of
Federal Regulations as follows:
PART 567--CAPITAL
14. The authority for citation for part 567 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828 (note)
15. In Sec. 567.5 revise paragraph (a)(1)(iii) to read as follows:
Sec. 567.5 Components of capital.
(a) * * *
(1) * * *
(iii) Minority interests in the equity accounts of the subsidiaries
that are fully consolidated.
* * * * *
16. In Section 567.6
A. Remove paragraphs (a)(2)(vi)(E)(3)(i) and (ii);
B. Redesignate (a)(2)(vi)(E)(3)(iii) as (a)(2)(vi)(E)(3).
17. In Section 567.11
A. Redesignate paragraph (c)(3) as paragraph (c)(4) and add a new
paragraph (c)(3);
B. Add paragraph (d).
The added text reads as follows:
Sec. 567.11 Reservation of authority.
* * * * *
(c) * * *
(3) OTS may find that the capital treatment for an exposure to a
transaction not subject to consolidation on the savings association's
balance sheet does not appropriately reflect the risks imposed on the
savings association. Accordingly, OTS may require the savings
association to treat the transaction as if it were consolidated on the
savings association's balance sheet. OTS will look to the substance of
and risk associated with the transaction as well as other relevant
factors in determining whether to require such treatment and in
calculating regulatory capital as OTS deems appropriate.
* * * * *
(d) In making a determination under this paragraph (c) of this
section, the OTS will notify the savings association of the
determination and solicit a response from the savings association.
After review of the response by the savings association, the OTS shall
issue a final supervisory decision regarding the determination made
under paragraph (c) of this section.
18. In Appendix C to part 567, Section 1, redesignate paragraph
(c)(3) as paragraph (c)(4) to read as follows:
Appendix C to Part 567--Risk-Based Capital Requirements--Internal
Ratings-Based and Advanced Measurement Approaches
* * * * *
(c) * * *
(3) Regulatory capital treatment of unconsolidated entities. OTS
may find that the capital treatment for an exposure to a transaction
not subject to consolidation on the savings association's balance
sheet does not appropriately reflect the risks imposed on the
savings association. Accordingly, OTS may require the savings
association to treat the transaction as if it were consolidated on
the savings association's balance sheet. OTS will look to the
substance of and risk associated with the transaction as well as
other relevant factors in determining whether to require such
treatment and in calculating regulatory capital as OTS deems
appropriate.
(4) Other supervisory authority. Nothing in this appendix limits
the authority of the OTS under any other provision of law or
regulation to take supervisory or enforcement action, including
action to address unsafe or unsound practices or conditions,
deficient capital levels, or violations of law.
* * * * *
Appendix C to Part 567--[Amended]
19. In appendix C to part 567 remove section 42(l) and redesignate
section 42(m) as section 42(l).
By order of the Board of Governors of the Federal Reserve
System.
Jennifer J. Johnson,
Secretary of the Board.
Dated: Washington, DC, this 27th day of August 2009.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
John C. Dugan,
Comptroller of the Currency.
Dated: August 31, 2009.
[[Page 47148]]
By the Office of Thrift Supervision.
John E. Bowman,
Acting Director.
[FR Doc. E9-21497 Filed 9-14-09; 8:45 am]
BILLING CODE 6210-02-P