Full text of Press Releases of the Board of Governors of the Federal Reserve System : Final rule on capital requirements for asset-backed commercial paper programs : Attachment 1

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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket No. 04-19]
RIN 1557-AC76
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. 2004-36]
RIN 1550-AB79
Risk-Based Capital Guidelines; Capital Adequacy Guidelines;
Capital Maintenance: Consolidation of Asset-Backed Commercial Paper Programs
and Other Related Issues
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: Final rule.
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 amending their risk-based capital
standards by removing a sunset provision that would preclude a certain capital treatment for
asset-backed commercial paper (ABCP) programs after a certain date. The final rule will
permanently permit sponsoring banks, bank holding companies, and thrifts (collectively,
sponsoring banking organizations) to exclude from their risk-weighted asset base those assets in
ABCP programs that are consolidated onto sponsoring banking organizations’ balance sheets as
a result of Financial Accounting Standards Board Interpretation No. 46, Consolidation of
Variable Interest Entities, as revised (FIN 46-R). This final rule will make permanent an existing
interim final rule with a sunset date of July 1, 2004.
The agencies also are implementing more risk-sensitive risk-based capital standards for
credit exposures arising from involvement with ABCP. This final rule generally requires
banking organizations to hold risk-based capital against eligible ABCP liquidity facilities with an
original maturity of one year or less that provide liquidity support to ABCP by imposing a 10
percent credit conversion factor on such facilities. Eligible ABCP liquidity facilities with an
original maturity exceeding one year remain subject to the current 50 percent credit conversion
factor. Ineligible ABCP liquidity facilities (that is, liquidity facilities that fail to meet certain

2
asset quality tests) are treated as direct credit substitutes or recourse obligations. The capital
charge on liquidity facilities providing support to ABCP would not be required if a banking
organization must or chooses to consolidate the related ABCP program for purposes of riskbased capital.
The agencies have decided not to implement the proposed risk-based capital charge for
securitizations of revolving retail credit facilities (for example, credit card receivables) that
incorporate early amortization provisions. In addition, the agencies are making technical
amendments to their risk-based capital standards by deleting tables and attachments that
summarize risk categories, credit conversion factors, and transitional arrangements.
DATES: This final rule is effective September 30, 2004. However, any banking organization
may elect to adopt, as of [date of publication of this rule], the capital treatment described in
this final rule for assets in ABCP programs that are consolidated onto the balance sheets of
sponsoring banking organizations as a result of FIN 46-R. All liquidity facilities that provide
support to ABCP will be treated as "eligible ABCP liquidity facilities," regardless of their
compliance with the definition of "eligible ABCP liquidity facilities" in the final rule, until
September 30, 2005. On that date and thereafter, liquidity facilities that do not meet the final
rule's definition of "eligible ABCP liquidity facility" will be treated as recourse obligations or
direct credit substitutes.

FOR FURTHER INFORMATION CONTACT:
OCC: Amrit Sekhon, Risk Expert, Capital Policy Division, (202) 874-5211; Laura
Goldman, Counsel, 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 Project Manager, Policy, (202) 452-2982, David
Kerns, Supervisory Financial Analyst, (202) 452-2428, Barbara Bouchard, Deputy Associate
Director, (202) 452-3072, Division of Banking Supervision and Regulation; or Mark E. Van Der
Weide, Senior 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: Christine A. Smith, Project Manager, (202) 906-5740; or Karen Osterloh, Special
Counsel, Regulation and Legislation Division, Chief Counsel’s Office, (202) 906-6639, Office of
Thrift Supervision, 1700 G Street, NW, Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I.

Background
Asset-Backed Commercial Paper Programs
A.

3
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.1 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
externally rated 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 credit ratings that facilitate the issuance of the commercial paper.2
B.
ABCP Programs and FIN 46-R
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). FIN 46 required
the consolidation of variable interest entities (VIEs) onto the balance sheets of companies
deemed to be the primary beneficiaries of those entities by no later than the end of the first
annual reporting period beginning after June 15, 2003. FIN 46 was then revised by FASB in
December 2003 (that is, FIN 46-R) and generally was effective for public banking organizations
by March 31, 2004. FIN 46-R clarified several issues relating to the consolidation of VIEs and
provided multiple and delayed effective dates, but did not directly affect issues relevant to this
rulemaking.
FIN 46-R requires the consolidation of many ABCP programs onto the balance sheets of
banking organizations.3 In contrast, under pre-FIN 46 accounting standards, the sponsors of
ABCP programs normally were not required to consolidate the assets of these programs.
Banking organizations that are required to consolidate ABCP program assets must include all of
the program assets (mostly receivables and securities) and liabilities (mainly commercial paper)
on their 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 the tier 1 leverage and risk-based capital ratios of banking organizations
that must consolidate the assets held in ABCP programs.
C.
1

Interim Final and Proposed Rules

ABCP programs generally also include structured investment vehicles, which are entities that earn a spread
by issuing commercial paper and medium-term notes and using the proceeds to purchase highly-rated debt
securities.
2
For the purposes of this final 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 program; or administers the program by monitoring the assets, arranging for debt
placement, compiling monthly reports, or ensuring compliance with the program documents and with the
program's credit and investment policy.
3
Under FIN 46-R, 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-R if it is designed to
have adequate capital, as described in FIN 46-R, and its shareholders control the entity with their voting or
similar rights and are proportionally 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-R 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
(or both) is the primary beneficiary and must consolidate the VIE.

4
The agencies believe that the consolidation of ABCP program assets generally would
result in risk-based capital requirements that do not appropriately reflect the risks faced by
banking organizations involved with the programs. Sponsoring banking organizations generally
face limited risk exposure to ABCP programs. This risk usually is confined to the credit
enhancements and liquidity facility arrangements that sponsoring 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 risks to which sponsoring banking organizations are exposed.
Because of the limited risks, the agencies adopted an interim final rule with a request for
comment that permitted sponsoring banking organizations, through the end of the first quarter of
2004, to exclude from risk-weighted assets (for purposes of calculating the risk-based capital
ratios) ABCP program assets that require consolidation under FIN 46-R (October 2003 interim
final rule). See 68 FR 56530 (October 1, 2003). The agencies also amended their risk-based
capital rules to exclude from tier 1 and total capital any minority interest in sponsored ABCP
programs that are consolidated under FIN 46-R. 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 was initially scheduled to expire on
April 1, 2004. However, the agencies subsequently issued another interim final rule to extend to
July 1, 2004 the time during which the interim risk-based capital treatment would be in effect.
See 69 FR 22382 (April 26, 2004).
Concurrent with the publication of the October 2003 interim final rule, the agencies also
published a notice of proposed rulemaking (NPR) that would make permanent the interim riskbased capital treatment for consolidated ABCP program assets. See 68 FR 56568 (October 1,
2003). The NPR also proposed to establish risk-based capital requirements for (1) short-term
liquidity facilities extended to ABCP programs and (2) securitizations of revolving credit
exposures (for example, credit card receivables) that incorporate early amortization provisions.
The period during which the interim final rules have been in effect has provided the agencies
with additional time to develop appropriate risk-based capital requirements for banking
organizations’ sponsorship of ABCP programs and their provision of liquidity support to ABCP,
and to receive and analyze comments from the industry on the NPR.
Collectively, the agencies received 13 comment letters on the October 2003 interim final
rule and the NPR. Commenters uniformly supported the exclusion of ABCP program assets
from the risk-based capital calculations. Commenters expressed concern, however, with certain
other aspects of the NPR, notably the credit conversion factor for eligible, short-term liquidity
facilities and the NPR’s relationship to the Basel Accord revision process.4
II.

Final Rule

A.
Exclusion of ABCP Program Assets and Related Minority Interests
In this final rule, the agencies are amending their risk-based capital standards by
removing the interim final rule’s July 1, 2004 sunset provision. Thus, the final rule will make
4

The risk-based capital standards of the agencies are based on the July 1988 Accord on International
Convergence of Capital Measurements and Capital Standards adopted by the Basel Committee on Banking
Supervision. The Basel Committee, however, is currently in the process of revising the 1988 Accord. See the
proposed revision of the Basel Capital Accord, dated June 2004, issued by the Basel Committee.

5
permanent the exclusion of ABCP program assets consolidated under FIN 46-R and any
associated minority interests from risk-weighted assets and tier 1 capital, respectively, when
sponsoring banking organizations calculate their tier 1 and total risk-based capital ratios.
The risk-based capital treatment does not alter generally accepted accounting principles
(GAAP) or the manner in which banking organizations must report consolidated on-balance
sheet assets pursuant to FIN 46-R. In addition, the risk-based capital treatment does not affect
the denominator of the tier 1 leverage capital ratio, which is based primarily on on-balance sheet
assets as reported under GAAP. Thus, as a result of FIN 46-R, banking organizations must
include all assets of consolidated ABCP programs as part of on-balance sheet assets for purposes
of calculating the tier 1 leverage capital ratio. One commenter objected to this treatment,
arguing that ABCP program assets should also be excluded from on-balance sheet assets when
calculating the tier 1 leverage ratio. However, the agencies typically do not remove on-balance
sheet assets from the total asset base for purposes of calculating the leverage ratio because the
leverage ratio is intended to work in conjunction with the risk-based capital standards by
providing a simple, GAAP-based measure of capital adequacy. There was not, in the agencies’
judgment, sufficient reason to revise the leverage ratio in the manner suggested.
As a general matter, 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. However, under this final rule, minority interests related to sponsoring banking
organizations’ ABCP program assets consolidated as a result of FIN 46-R are not to be included
in tier 1 capital. Because the program’s assets would not be consolidated for risk-based capital
purposes, the agencies believe that the minority interest that supports those assets should not be
included in the banking organization’s consolidated regulatory capital. Thus, the reported tier 1
leverage capital ratio for a sponsoring banking organization would likely be lower than it would
be if the ABCP program assets were consolidated and related minority interest were permitted to
remain in the capital calculation. The agencies do not anticipate that the exclusion of minority
interests related to consolidated ABCP program 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.
In addition, commenters noted that the definitions of an “ABCP program” proposed in
the NPR were not consistent among the agencies, and requested that the definitions be
harmonized. Two commenters asked that the definition be broadened to explicitly include
structured investment vehicles.5 The agencies believe that it is important that the definition of an
ABCP program be both clear and consistent among the agencies. Therefore, the final rule for
each agency defines an “ABCP program” to be a program that primarily issues (that is, more
than 50 percent) externally rated commercial paper backed by assets or other exposures held in a
bankruptcy-remote, special purpose entity. As a result, the definition of “ABCP program”
generally includes structured investment vehicles and securities arbitrage programs. The
agencies believe that the “primarily issues” requirement ensures that programs covered by this
final rule retain their ABCP character by requiring that such programs generally issue no less
than 50 percent ABCP.
Under the final rule, a banking organization will be able to exclude FIN 46-R related
assets from its risk-weighted asset base only with respect to programs that meet the rule’s
5

Structured investment vehicles are ABCP programs that issue commercial paper and medium-term notes
and use the proceeds to purchase highly-rated debt securities.

6
definition of an “ABCP program.” Thus, a banking organization sponsoring a program issuing
ABCP that does not meet the rule’s definition of an “ABCP program” must continue to include
the program’s assets in the institution’s risk-weighted asset base.
B.

Liquidity Facilities Supporting ABCP

In addition to the exclusion of consolidated ABCP program assets from risk-weighted
assets and related minority interests from tier 1 capital, the agencies are amending their riskbased capital requirements with respect to liquidity facilities that support ABCP. Liquidity
facilities supporting ABCP often take the form of commitments to lend to, or purchase assets
from, the ABCP 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. Under the current risk-based capital standards, liquidity facilities with an
original maturity of over one year (that is, long-term liquidity facilities) are converted to an onbalance sheet credit equivalent amount using the 50 percent credit conversion factor. Prior to
this final rule, liquidity facilities with an original maturity of one year or less (that is, short-term
liquidity facilities) were converted to an on-balance sheet credit equivalent amount utilizing the
zero percent credit conversion factor. As a result, such short-term liquidity facilities were not
subject to any risk-based capital charge prior to this rule.
In the agencies’ view, a banking organization that provides liquidity facilities to ABCP is
exposed to credit risk regardless of the term of the liquidity facilities. For example, an ABCP
program may require a liquidity facility to purchase assets from the program at the first sign of
deterioration in the credit quality of an asset pool, thereby removing such assets from the
program. In such an event, a draw on the liquidity facility exposes the banking organization to
credit risk. The agencies believe that the existing risk-based capital rules do not adequately
reflect the risks associated with liquidity facilities supporting ABCP.
Although the agencies believe that liquidity facilities expose banking organizations to
credit risk, the agencies also believe that the short term of commitments with an original maturity
of one year or less exposes banking organizations to a lower degree of credit risk than longer
term commitments, provided the liquidity facility meets certain asset quality requirements
discussed below. This difference in degree of credit risk should be reflected in the risk-based
capital requirement for the exposure. For this reason, in the NPR the agencies proposed a 20
percent credit conversion factor on eligible short-term liquidity facilities providing liquidity
support to ABCP.
Two commenters explicitly agreed with the agencies’ position that regulatory capital
should be held against liquidity facilities that provide liquidity support to ABCP and that have an
original maturity of one year or less. Seven commenters stated that the proposed 20 percent
credit conversion factor for short-term liquidity facilities was too high given the low historical
losses and the overall strength of the credit risk profiles of such liquidity facilities. Six of these
seven commenters instead suggested that a conversion factor in the range of 5-10 percent would
be more appropriate given banking organizations’ credit loss experience with short-term liquidity
facilities. One commenter noted that the proposed capital charge would put U.S. banks at a
competitive disadvantage relative to foreign banks and non-bank funding sources. The agencies
generally agree with these commenters. In addition, recent examination experience suggests that
application of a 10 percent credit conversion factor would result in an effective capital charge

7
that is more reflective of the amount of economic capital that banking organizations maintain
internally for short-term liquidity facilities supporting ABCP.
After consideration of the comments, the agencies have decided to impose a 10 percent
credit conversion factor on eligible short-term liquidity facilities supporting ABCP, as opposed
to the 20 percent credit conversion factor set forth in the NPR. A 50 percent credit conversion
factor will continue to apply to eligible long-term ABCP liquidity facilities. These credit
conversion factors will apply regardless of whether the structure issuing the ABCP meets the
definition of an “ABCP program” under the final rule. For example, a capital charge would
apply to an eligible short-term liquidity facility that provides liquidity support to ABCP where
the ABCP constitutes less than 50 percent of the securities issued causing the issuing structure
not to meet this final rule’s definition of an “ABCP program.” However, if a banking
organization (1) does not meet this final rule’s definition of an “ABCP program” and must
include the program’s assets in its risk-weighted asset base, or (2) otherwise chooses to include
the program’s assets in risk-weighted assets, then there will be no risk-based capital requirement
assessed against any liquidity facilities that support that program’s ABCP. In addition,
ineligible liquidity facilities will be treated as recourse obligations or direct credit substitutes.
The resulting credit equivalent 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 an eligible short-term liquidity facility providing liquidity
support to ABCP covered an asset-backed security (ABS) externally rated AAA, then the
notional amount of the liquidity facility would be converted at 10 percent to an on-balance sheet
credit equivalent amount and assigned to the 20 percent risk weight category appropriate for
AAA-rated ABS.6
C.

Overlapping Exposures to an ABCP Program

In many cases, a banking organization may have multiple exposures to 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.
Accordingly, the final rule requires that a banking organization must hold risk-based capital only
once against the assets 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 that results in the highest capital charge to the overlapping portion of
the exposures.
For example, assume a banking organization provides a program-wide credit
enhancement that would absorb 10 percent of the losses in all of the underlying asset pools in an
ABCP program and pool-specific liquidity facilities that cover 100 percent of each of the
underlying asset pools.7 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
6

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).
7
This example assumes that a banking organization is able to use the internal ratings that it has assigned to
liquidity facilities providing support to ABCP and also assumes that such facilities would be assigned to the 100
percent risk category.

8
percent of the liquidity facilities it is providing to each of the underlying asset pools. However,
if a banking organization chooses to consolidate ABCP program assets onto its balance sheet for
risk-based capital purposes 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 have overlapping exposures to an ABCP program,
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, some systemic duplication may occur where multiple banking organizations have
overlapping exposures to the same ABCP program.
D.

Asset Quality Test

In order for a liquidity facility, either short- or long-term, that supports ABCP not to be
considered a recourse obligation or a direct credit substitute, it must meet the rule’s definition of
an “eligible ABCP liquidity facility.” The NPR proposed that the liquidity facility, in order to be
an eligible liquidity facility, meet a reasonable asset quality test that, among other things,
precluded funding assets that are 60 days or more past due or in default. The funding of assets
past due 60 days or more using a liquidity facility exposes the institution to a greater degree of
credit risk than the funding of assets of a more current nature.
Five commenters objected to the uniform 60 days past due asset quality test, noting that
although it may be appropriate for trade receivables, it is not appropriate for many other asset
classes. These commenters believed that a reasonable asset quality test could be defined to
include assets that are 90 to 180 days or more past due, depending upon the type of asset (for
example, residential mortgages or credit cards). Furthermore, one commenter stated that the 60day delinquency standard would significantly overstate the risk of default in the case of credit
cards since the amount of credit card receivables that is ultimately charged-off between 120 days
and 180 days usually is far less than the amount that is 60-days delinquent. Five commenters
suggested that the definition of an eligible liquidity facility should be more flexible and
incorporate asset quality tests that vary based on the specific transaction structures or underlying
asset types.
Specifically, these commenters proposed that each banking organization should be
allowed to develop its own asset quality tests, subject to supervisory oversight. Although the
agencies considered the possibility of developing separate past due requirements for different
asset categories, and the possibility of permitting each banking organization to develop its own
asset quality test, the agencies believe that these approaches would be complex to develop and
burdensome to administer, and would lack uniform application among banking organizations.
The agencies believe that it is important to ensure that the primary function of an eligible
liquidity facility is to provide liquidity and, accordingly, such a facility should not be used to
fund assets with the higher degree of credit risk typically associated with seriously delinquent
assets. However, the agencies agree that a limitation of 60 days or more past due might be too
constraining for some asset types held in an ABCP program.
This final rule increases the number of days in the past due requirement to 90 days or
more past due. The agencies believe that when assets are 90 days or more past due, they
typically have deteriorated to the point where there is an extremely high probability of default.

9
Assets that are 90 days past due, for example, often must be placed on non-accrual status in
accordance with the agencies’ Uniform Retail Credit Classification and Account Management
Policy. See 65 FR 36904 (June 12, 2000). Further, they generally must also be classified
“substandard” under that Policy.
Commenters also suggested that the asset quality test should be modified to reflect
guarantees providing credit protection to the bank providing the liquidity facility. The agencies
agree that in the case of a government guarantee, the past due limitation is not a relevant asset
quality test. As a result, this final rule does not apply the “days past due” limitation in the asset
quality test with respect to assets that are either conditionally or unconditionally guaranteed by
the United States government or its agencies, or another OECD central government subsequent
to a draw on a liquidity facility.
In addition, to qualify as an eligible liquidity facility, the agencies proposed in the NPR
that, if the assets covered by the liquidity facility are initially externally rated (at the time the
facility is provided), the facility may be used to fund only those assets that are externally rated
investment grade at the time of funding. If the asset quality tests are not met (that is, if a banking
organization actually funds through the liquidity facility assets that do not satisfy the facility’s
asset quality tests), the liquidity facility will be considered a recourse obligation or a direct credit
substitute and generally will be converted at 100 percent as opposed to 10 or 50 percent.8
Three commenters asserted that the asset quality test proposed for transactions with
externally rated assets was inappropriate, noting that the test is irrelevant for transactions without
a ratings-based trigger where asset quality is determined using cash flow or other benchmarks.
These commenters also noted that, in some cases, the price of assets purchased under the
liquidity facility is adjusted for the assets’ credit quality, mitigating the need for a ratings-based
asset quality test. Moreover, one commenter asserted that the increase in regulatory capital that
occurs when the rating on an asset-backed security underlying a liquidity facility declines makes
the additional limitation on non-investment grade assets unnecessary.
While the agencies acknowledge that some liquidity facility agreements adjust the
purchase price of assets for credit quality, the agencies believe that most purchases of rated
assets through liquidity facilities are conducted at a price that exceeds the assets’ market value,
which in the agencies’ view is equivalent to credit enhancement. Even in cases where the
purchase price is adjusted, it is not necessarily adjusted to market value.
For these reasons, the final rule considers the practice of purchasing assets that are
externally rated below investment grade out of an ABCP program as the equivalent of providing
credit protection to the commercial paper investors. Thus, liquidity facilities permitting
purchases of below investment grade securities will be considered either recourse or direct credit
substitutes. However, for the same reason mentioned previously, this final rule does not apply
the “investment grade” limitation in the asset quality test with respect to assets that are
conditionally or unconditionally guaranteed by the United States government or its agencies, or
another OECD central government subsequent to a draw on a liquidity facility.
E.
8

Applicability of the Market Risk Capital Requirements

In the NPR, the agencies proposed an additional requirement that ABCP liquidity facilities only fund
against assets that met the funding criteria under the asset quality test. The agencies believe that this criterion is
unnecessary and, as a result, have deleted it from the final rule.

10
F.
The amendments to the risk-based capital standards with respect to liquidity facilities
reflect the efforts of the agencies to ensure that banking organizations maintain adequate capital
with respect to exposures represented by liquidity facilities supporting ABCP. Under the current
risk-based capital standards, liquidity facilities held in the trading book may be subject to the
market risk capital requirements instead of the banking book capital requirements.
Consequently, in the NPR, the agencies proposed that banking organizations subject to the
market risk capital rules would not be permitted to apply those rules to any liquidity facility
supporting ABCP held in the trading book. This final rule adopts the proposed market risk
exception to preclude banking organizations that are subject to the market risk capital rules from
applying those rules to positions held in a bank’s trading book that act, in form or in substance,
as liquidity facilities supporting ABCP.
Under this final rule, any facility held in the trading book whose primary function, in
form or in substance, is to provide liquidity to ABCP – even if the facility does not qualify as an
eligible ABCP liquidity facility under the rule – will be subject to the banking book risk-based
capital requirements. Specifically, organizations will be required to convert the notional amount
of all trading book positions that provide liquidity to ABCP to credit equivalent amounts by
applying the appropriate banking book credit conversion factors. For example, the full amount
of all eligible ABCP liquidity facilities with an original maturity of one year or less will be
subject to a 10 percent conversion factor, as described previously, regardless of whether the
facility is carried in the trading account or the banking book.
Two commenters objected to this provision, noting that it ignores GAAP accounting
decisions with respect to the trading book classification of individual transactions, and that a
well-defined mechanism for assessing capital in the trading book already exists. In addition,
these commenters stated that the mark-to-market accounting discipline applied to trading book
positions, combined with individual banking organizations’ market value adjustments for
illiquidity or pricing uncertainty, assures that adequate capital is held on a “real-time” basis.
These commenters also suggested that banking organizations be permitted to apply the trading
book capital rules to liquidity facilities or arrangements that satisfy certain criteria. While the
agencies understand the benefit of consistent classification under GAAP and appreciate the value
of the market risk capital framework, the agencies believe that a market risk exception for
ABCP-related liquidity facilities is necessary to ensure an adequate risk-based capital charge for
such exposures and to mitigate regulatory capital arbitrage opportunities.
II.

Early Amortization Capital Charge

In the NPR, the agencies also proposed 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 risk of
significant credit losses.
The NPR was not the first time that the agencies have raised the issue of whether to
impose a capital charge on securitizations of revolving credit exposures that incorporate early

11
amortization provisions. On March 8, 2000, the agencies published a notice of proposed
rulemaking on recourse obligations and direct credit substitutes (March 2000 NPR). See 65 FR
12320. In the March 2000 NPR, 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 NPR 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 a particular
securitization transaction. In the subsequent November 2001 final rule (66 FR 59614)
(November 2001 final rule), which implemented many of the provisions in the March 2000 NPR,
the agencies reiterated their concerns with early amortization, indicating that the risks associated
with securitization, including those posed by an early amortization feature, were not fully
captured in the then current capital rules. In the November 2001 final rule, however, the
agencies did not impose a special capital charge on securitizations with early amortization
features.
In the interim, the Basel Committee on Banking Supervision (Basel Committee) 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. The risk-based capital charge for early amortization proposed in the NPR was based on
the proposal set forth by the Basel Committee in its third consultative paper issued in April
2003.9
Three commenters stated that the proposal as set forth in the NPR was, in their view, a
significant improvement over previous proposed capital charges for early amortization. Five
commenters, however, recommended that any changes to the regulatory capital guidelines in this
area be made through the Basel process. Coordinating both the timing and the substance of an
early amortization capital charge internationally would help maintain a level playing field across
countries and would avoid requiring U.S. banking organizations to implement new capital rules,
only to require them to implement slightly different rules in the future when the agencies
implement the Basel changes. Moreover, three commenters requested that the agencies establish
an alternative approach for controlled early amortization transactions similar to that proposed by
the Basel Committee in the third Consultative Paper (dated April 2003).
At this time, the capital treatment of retail credit, including securitizations of revolving
credits, may change as the revised Basel framework proceeds through the U.S. rulemaking
process. Therefore, the ultimate treatment of securitizations of revolving credit exposures
incorporating early amortization provisions is still uncertain. As a result, the agencies have
decided that, at this time, it would not be appropriate to implement a risk-based capital charge for
securitizations of revolving credits when the treatment may be revised with the implementation
of the new Basel Accord. However, the agencies intend to revisit this issue in the near future for
possible domestic implementation for all U.S. banking organizations.
III.Elimination of Summary Sections of Rules Text
The final rule also removes tables and attachments in the risk-based capital standards that
9

The credit conversion factors used in the October 2003 NPR mirror those in the agencies’ August 2003
Advance Notice of Proposed Rulemaking for non-controlled early amortization of uncommitted retail credit
lines. See 68 FR 45899 (August 4, 2003).

12
summarize the risk categories, credit conversion factors, and transitional arrangements. These
tables and attachments are 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 in 1989. No comments were received on this issue. The agencies consider
this change to be technical in nature and do not intend any substantive impact on the risk-based
capital standards.
IV. Effective Dates
This final rule is effective September 30, 2004. However, any banking organization may
elect to adopt, as of [date of publication of this rule], the capital treatment described in this
final rule for assets in ABCP programs that are consolidated onto the balance sheets of
sponsoring banking organizations as a result of FIN 46-R. All liquidity facilities providing
liquidity support to ABCP will be treated as “eligible ABCP liquidity facilities” until September
30, 2005. On that date, all ABCP-related liquidity facilities that do not meet this final rule’s
definition of an eligible ABCP liquidity facility will be treated as direct credit substitutes or
recourse obligations. This transition period for ABCP-related liquidity facilities existing prior to
this final rule’s effective date should provide banking organizations with sufficient time to revise
their liquidity facilities over the next year to ensure that the facilities meet the eligibility criteria
set forth in this final rule.
V.

Regulatory Analysis

Riegle Community Development and Regulatory Improvement Act
Section 302 of Riegle Community Development and Regulatory Improvement Act (12
USC 4802) generally requires that regulations take effect on the first day of a calendar quarter
unless an agency finds good cause that the regulations should become effective sooner and
publishes its finding with the rule. The agencies believe that it is important to make this final
rule effective before banking organizations must calculate their regulatory risk-based capital
ratios at the end of the third quarter 2004. If ABCP program assets are consolidated onto the
balance sheets of sponsoring banking organizations under FIN 46-R, then the agencies believe
that the resulting capital requirements could be excessive in light of the risks incurred by those
organizations as related to those assets. In addition, with respect to liquidity facilities that
support ABCP, the current risk-based capital charges may not sufficiently reflect the risks
associated with such liquidity facilities. The issuance of this final rule with a September 30,
2004, effective date will ensure that banking organizations maintain appropriate risk-based
capital levels with respect to ABCP program assets and ABCP liquidity facilities in calculating
their regulatory capital ratios for the third quarter 2004.
Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act, the Agencies have
determined that this final rule will 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.). For purposes of the Regulatory Flexibility Act, “small entities” are banking
organizations having assets of $150 million or less. There are approximately 18 banking

13
organizations that will be affected by this final rule. All are well over that size threshold.
Accordingly, a regulatory flexibility analysis is not required.
Paperwork Reduction Act
The Agencies have determined that this final 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
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 and OTS believe that exclusion of
consolidated ABCP program assets from risk-weighted assets for risk-based capital purposes will
not result in any expenditures by national banks or savings associations. The exclusion of
consolidated ABCP program assets is designed to offset the effect of FIN 46-R on risk-based
capital. With respect to the risk-based capital treatment of liquidity facilities, because all
national banks and savings associations that provide liquidity facilities to ABCP programs
currently exceed regulatory minimum capital requirements, the OCC and OTS do not believe
these banks will be required to raise additional capital.
Executive Order 12866
The OCC and OTS have determined that this final rule is not a significant regulatory
action under Executive Order 12866.
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, Mortgages, Reporting and recordkeeping requirements, Securities.
12 CFR Part 225
Administrative practice and procedure, Banks, banking, 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.

14
12 CFR Part 567
Capital, Reporting and recordkeeping requirements, Savings associations.
DEPARTMENT OF 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 amended as follows:
PART 3—MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES
1. The authority citation for part 3 continues to read as follows:
2.
Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n note, 1835, 3907, and
3909.
2. In appendix A to part 3, section 1 is amended as follows:
a. Paragraphs (c)(31) to (c)(38) are redesignated as paragraphs (c)(32) to (c)(39);
b. Paragraph (c)(30) is removed;
c. Paragraphs (c)(19) to (c)(29) are redesignated as paragraphs (c)(21) to (c)(31);
d. New paragraph (c)(20) is added;
e. Paragraphs (c)(9) to (c)(18) are redesignated as paragraphs (c)(10) to (c)(19);
f. Paragraph (c)(8) is redesignated as paragraph (c)(9) and revised;
g. Paragraphs (c)(4) to (c)(7) are redesignated as paragraphs (c)(5) to (c)(8);
h. New paragraph (c)(4) is added; and
i. Paragraph (c)(3) is revised.
2. In appendix A to part 3, section 2, paragraph (a)(3) is revised.
3. In appendix A to part 3, section 3 is amended as follows:
a. Paragraph (a)(4)(iii) is revised;
b. New paragraphs (a)(5) and (a)(6) are added;
c. Paragraph (b) is revised by amending the fourth sentence;
d. Paragraphs (b)(2)(ii) is revised;

15
e. Paragraphs (b)(4) and (b)(5) are redesignated as paragraphs (b)(5) and (b)(7),
respectively;
f. New paragraph (b)(4) is added;
g. Newly redesignated paragraph (b)(5)(i) is revised; and
h. New paragraph (b)(6) is added.
4. In appendix A to part 3, section 4 is amended as follows:
a. Paragraphs (a)(4)(vi) and (a)(4)(vii) are revised;
b. New paragraph (a)(4)(viii) is added;
c. Paragraphs (a)(11)(vi) and (a)(11)(vii) are revised;
d. New paragraph (a)(11)(viii) is added; and
e. Paragraphs (j) and (k) are deleted.
5. In appendix A to part 3, 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 primarily issues
externally rated commercial paper backed by assets or other exposures held in a bankruptcyremote, special-purpose entity.
(4) Asset-backed commercial paper 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)
program; or
(iii)

Approves the asset pools to be purchased by an asset-backed commercial paper

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.

16
*****
(9) Commitment means any arrangement that obligates a national bank to: (i) Purchase
loans or securities; or (ii) extend credit in the form of loans or leases, participations in loans or
leases, overdraft facilities, revolving credit facilities, home equity lines of credit, liquidity
facilities, or similar transactions.
*****
(20) Liquidity facility means a legally binding commitment to provide liquidity to various
types of transactions, structures or programs. A liquidity facility that supports asset-backed
commercial paper, in any amount, by lending to, or purchasing assets from any structure,
program, or conduit constitutes an asset-backed commercial paper liquidity facility.
*****
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)(23) 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 3(a)(5)(i) of this appendix A.
*****
Section 3. Risk Categories/Weights for On-Balance Sheet Assets and Off-Balance Sheet Items
*****
(a) ***
*****
(4) ***
*****
(iv)

Asset- or mortgage backed securities that are externally rated are risk weighted in
accordance with section 4(d) of this appendix A.

*****
(5) Asset-backed commercial paper programs subject to consolidation. (i) 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.

17
(ii) 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, asset-backed
commercial paper liquidity facilities, and loans, in accordance with section 3 and section 4 of
this appendix A.
(iii) If a bank either is not permitted to exclude consolidated asset-backed commercial
paper program assets or elects not to exclude consolidated asset-backed commercial paper
program assets from its risk-weighted 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 sections 3(a) and 4 of this appendix A. Any direct credit substitutes
and recourse obligations (including residual interests and asset-backed commercial paper
liquidity facilities), and loans that sponsoring banks provide to such asset-backed commercial
paper programs are not subject to a capital charge under this section 4 of this appendix A.
(iv) If a bank has multiple overlapping exposures (such as a program-wide credit
enhancement and an asset-backed commercial paper liquidity facility) to an asset-backed
commercial paper program that is not consolidated for risk-based capital purposes, the bank must
apply the highest capital charge applicable to the exposures but is not required to hold capital
multiple times for the overlapping exposures under section 4 of this appendix A.
(6) Other variable interest entities subject to consolidation. If a bank is required to
consolidate the assets of a variable interest entity other than an asset-backed commercial paper
program 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 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.
(b) *** Second, the resulting credit equivalent amount is then assigned to the proper risk
category using the criteria regarding obligors, guarantors, and collateral listed in section 3(a) of
this appendix A, or external credit rating in accordance with section 4(d), if applicable. ***
(1) ***
*****
(2) *** (i) ***
(ii) Unused portion of commitments with an original maturity exceeding one-year;17
however, commitments that are asset-backed commercial paper liquidity facilities must satisfy
the eligibility requirements under section 3(b)(6)(ii) of this appendix A;
*****
(4) 10 percent credit conversion factor. Unused portion of asset-backed commercial
paper liquidity facilities with an original maturity of one year or less that satisfy the eligibility
requirements under section 3(b)(6)(ii) of this appendix A.
(5) *** (i) Unused portion of commitments with an original maturity of one year or less,
but excluding any asset-backed commercial paper liquidity facilities;

18
*****
(6) Liquidity facility provided to asset-backed commercial paper. (i) Noneligible assetbacked commercial paper liquidity facilities treated as recourse or direct credit substitute.
Unused portion of asset-backed commercial paper liquidity facilities that do not meet the criteria
for an eligible liquidity facility provided to asset-backed commercial paper in accordance with
section 3(b)(6)(ii) 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 with section 4 of this
appendix A.
(ii) Eligible asset-backed commercial paper liquidity facility. Except as provided in
section 3(b)(6)(iii) of this appendix A, in order for the unused portion of an asset-backed
commercial paper liquidity facility to be eligible for either the 50 percent or 10 percent credit
conversion factors under section 3(b)(2)(ii) or 3(b)(4) of this appendix A, the asset-backed
commercial paper liquidity facility must satisfy the following criteria:
(A) At the time of draw, the asset-backed commercial paper liquidity facility must be
subject to a asset quality test that:
(1) Precludes funding of assets that are 90 days or more past due or in default; and
(2) If the assets that an asset-backed commercial paper liquidity facility is required to
fund are externally rated securities at the time they are transferred into the program, the assetbacked commercial paper liquidity 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.
(B) The asset-backed commercial paper 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 as provided in section 3(b)(6)(ii)(A) of this appendix A.
(iii) Exception to eligibility requirements for assets guaranteed by the United States
Government or its agencies, or the central government of an OECD country. Notwithstanding
the eligibility requirements for asset-backed commercial paper program liquidity facilities in
section 3(b)(6)(ii), the unused portion of an asset-backed commercial paper liquidity facility may
still qualify for either the 50 percent or 10 percent credit conversion factors under section
3(b)(2)(ii) or 3(b)(4) of this appendix A, if the assets required to be funded by the asset-back
commercial paper liquidity facility are guaranteed, either conditionally or unconditionally, by the
United States Government or its agencies, or the central government of an OECD country.
(iv) Transition period for asset-backed commercial paper liquidity facilities.
Notwithstanding the eligibility requirements for asset-backed commercial paper program
liquidity facilities in section 3(b)(6)(i) of this appendix A, the unused portion of an asset-backed
commercial paper liquidity will be treated as eligible liquidity facilities pursuant to section
3(b)(6)(ii) of this appendix A regardless of their compliance with the definition of eligible
liquidity facilities until September 30, 2005. On that date and thereafter, the unused portions of
asset-backed commercial paper liquidity facilities that do not meet the eligibility requirements in
section 3(b)(6)(i) of this appendix A will be treated as recourse obligations or direct credit
substitutes.

19
*****
Section 4. Recourse, Direct Credit Substitutes and Positions in Securitizations
(a) ***
*****
(4) ***
*****
(vi) 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 case advances that meet the conditions of section 4(a)(8)(i)
and (ii) of this appendix A, are not direct credit substitutes;
(vii) Clean-up calls on third-party assets. Clean-up calls that are 10% or less of the
original pool balance and that are exercisable at the option of the bank are not direct credit
substitutes; and
(viii) Unused portion of noneligible asset-backed commercial paper liquidity facilities.
*****
(11) ***
*****
(vi) Credit derivatives issued that absorb more than the bank’s pro rata share of losses
from the transferred assets;
(vii) Clean-up calls. Clean-up calls that are 10% or less of the original pool balance and
that are exercisable at the option of the bank are not recourse arrangements; and
(viii) Noneligible asset-backed commercial paper liquidity facilities.
*****
6. Appendix B to part 3 is amended by adding a new sentence at the end of section 2,
paragraph (a) to read as follows:
Appendix B to Part 3—Risk-Based Capital Guidelines; Market Risk Adjustment
*****
Section 2. Definitions
*****
(a) *** Asset backed commercial paper liquidity facilities, in form or in substance, 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.
*****

20
[THIS SIGNATURE PAGE RELATES TO THE JOINT FINAL RULE “RISK-BASED
CAPITAL GUIDELINES; CAPITAL ADEQUACY GUIDELINES; CAPITAL
MAINTENANCE; CONSOLIDATION OF ASSET-BACKED COMMERCIAL PAPER
PROGRAMS AND OTHER RELATED ISSUES”]

July 13, 2004
Date

John D. Hawke, Jr.(signed)
John D. Hawke, Jr.
Comptroller of the Currency

21
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 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)
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 made:
a. Section II.A.1.c. is revised.
b. Section III.B.3.a., Definitions, is revised.
c. Section III.B.6. is revised.
d. In section III.D –
i. The third sentence of the introductory paragraph is revised and the last
sentence is removed.
ii. In paragraph 2., Items with a 50 percent conversion factor, the fourth
undesignated paragraph is removed, the five remaining undesignated paragraphs are designated
as 2.a. through 2.e., and the newly designated paragraph 2.c. is revised.
iii. Paragraph 4., Items with a zero percent conversion factor, is redesignated as
paragraph 5. and a new paragraph 4., Items with a 10 percent conversion factor, is added.
iv. The first sentence in redesignated paragraph 5., 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
*****

22
II. ***
A. ***
1. ***
c. Minority interest in equity accounts of consolidated subsidiaries. This element is included in
tier 1 capital 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 (ABCP) (as defined
in section III.B.6. of this appendix A) 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 III.B.6. of this appendix.
*****
III. ***
B. ***
3. ***
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

23
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 thirdparty 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;
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; and
8. Liquidity facilities that provide liquidity support to ABCP (other than eligible ABCP
liquidity facilities).
iv. Eligible ABCP liquidity facility means a liquidity facility supporting ABCP, in form
or in substance, that is subject to an asset quality test at the time of draw that precludes funding
against assets that are 90 days or more past due or in default. In addition, if the assets that an
eligible ABCP liquidity facility is required to fund against are externally rated assets or
exposures at the inception of the facility, the facility can be used to fund only those assets or
exposures that are externally rated investment grade at the time of funding. Notwithstanding the
eligibility requirements set forth in the two preceding sentences, a liquidity facility will be
considered an eligible ABCP liquidity facility if the assets that are funded under the liquidity
facility and which do not meet the eligibility requirements are guaranteed, either conditionally or
unconditionally, by the U.S. government or its agencies, or by the central government of an

24
OECD country.
v. Externally rated means that an instrument or obligation has received a credit rating
from a nationally recognized statistical rating organization.
vi. Face amount means the notional principal, or face value, amount of an off-balance
sheet item; the amortized cost of an asset not held for trading purposes; and the fair value of a
trading asset.
vii. Financial asset means cash or other monetary instrument, evidence of debt, evidence
of an ownership interest in an entity, or a contract that conveys a right to receive or exchange
cash or another financial instrument from another party.
viii. Financial standby letter of credit means a letter of credit or similar arrangement that
represents an irrevocable obligation to a third-party beneficiary:
1. To repay money borrowed by, or advanced to, or for the account of, a second party
(the account party), or
2. To make payment on behalf of the account party, in the event that the account party
fails to fulfill its obligation to the beneficiary.
ix. Liquidity Facility means a legally binding commitment to provide liquidity support to
ABCP by lending to, or purchasing assets from, any structure, program, or conduit in the event
that funds are required to repay maturing ABCP.
x. Mortgage servicer cash advance means funds that a residential mortgage loan servicer
advances to ensure an uninterrupted flow of payments, including advances made to cover
foreclosure costs or other expenses to facilitate the timely collection of the loan. A mortgage
servicer cash advance is not a recourse obligation or a direct credit substitute if:
1. The servicer is entitled to full reimbursement and this right is not subordinated to other
claims on the cash flows from the underlying asset pool; or
2. For any one loan, the servicer's obligation to make nonreimbursable advances is
contractually limited to an insignificant amount of the outstanding principal balance of that loan.
xi. Nationally recognized statistical rating organization (NRSRO) means an entity
recognized by the Division of Market Regulation of the Securities and Exchange Commission
(or any successor Division) (Commission) as a nationally recognized statistical rating
organization for various purposes, including the Commission's uniform net capital requirements
for brokers and dealers.
xii. Recourse means the retention, by a bank, 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

25
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.x. of this appendix are not recourse
arrangements;
3. Retained subordinated interests that absorb more than their pro rata share of losses
from the underlying assets;
4. Assets sold under an agreement to repurchase, if the assets are not already included on
the balance sheet;
5. Loan strips sold without contractual recourse where the maturity of the transferred loan
is shorter than the maturity of the commitment under which the loan is drawn;
6. Credit derivatives issued that absorb more than the bank's pro rata share of losses from
the transferred assets;
7. Clean-up calls at inception that are greater than 10 percent of the balance of the
original pool of transferred loans. Clean-up calls that are 10 percent or less of the original pool
balance that are exercisable at the option of the bank are not recourse arrangements; and
8. Liquidity facilities that provide liquidity support to ABCP (other than eligible ABCP
liquidity facilities).
xiii. Residual interest means any on-balance sheet asset that represents an interest
(including a beneficial interest) created by a transfer that qualifies as a sale (in accordance with
generally accepted accounting principles) of financial assets, whether through a securitization or
otherwise, and that exposes the bank 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.
xiv. Risk participation means a participation in which the originating party remains liable
to the beneficiary for the full amount of an obligation (e.g., a direct credit substitute)
notwithstanding that another party has acquired a participation in that obligation.
xv. Securitization means the pooling and repackaging by a special purpose entity of

26
assets or other credit exposures into securities that can be sold to investors. Securitization
includes transactions that create stratified credit risk positions whose performance is dependent
upon an underlying pool of credit exposures, including loans and commitments.
xvi. Sponsor means a bank that establishes an ABCP program; approves the sellers
permitted to participate in the program; approves the asset pools to be purchased by the
program; or administers the program by monitoring the assets, arranging for debt placement,
compiling monthly reports, or ensuring compliance with the program documents and with the
program's credit and investment policy.
xvii. Structured finance program means a program where receivable interests and assetbacked securities issued by multiple participants are purchased by a special purpose entity that
repackages those exposures into securities that can be sold to investors. Structured finance
programs allocate credit risks, generally, between the participants and credit enhancement
provided to the program.
xviii. Traded position means a position that is externally rated and is retained, assumed,
or issued in connection with an asset securitization, where there is a reasonable expectation that,
in the near future, the rating will be relied upon by unaffiliated investors to purchase the position;
or an unaffiliated third party to enter into a transaction involving the position, such as a purchase,
loan, or repurchase agreement.
*****
6. Asset-backed commercial paper programs. a. An asset-backed commercial paper
(ABCP) program means a program that primarily issues externally rated commercial paper
backed by assets or other exposures held in a bankruptcy-remote, special purpose entity.
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
ABCP program. If a bank excludes such consolidated ABCP program assets, the bank must
assess the appropriate risk-based capital charge against any 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.
c. If a bank has multiple overlapping exposures (such as a program-wide credit
enhancement and multiple pool-specific liquidity facilities) to an ABCP program that is not
consolidated for risk-based capital purposes, the bank is not required to hold duplicative riskbased capital under this appendix against the overlapping position. Instead, the bank should
apply to the overlapping position the applicable risk-based capital treatment that results in the
highest capital charge.
*****
III. ***
D. *** The resultant credit equivalent amount is assigned to the appropriate risk category

27
according to the obligor or, if relevant, the guarantor, the nature of any collateral, or external
credit ratings.47
*****
2. Items with a 50 percent conversion factor. ***
c.i. 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 ABCP liquidity facilities, 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.
ii Banks that are subject to the market risk rules are required to convert the notional
amount of eligible ABCP liquidity facilities, in form or in substance, with an original maturity of
over one year that are carried in the trading account at 50 percent to determine the appropriate
credit equivalent amount even though those facilities are structured or characterized as
derivatives or other trading book assets. Liquidity facilities that support ABCP, in form or in
substance, (including those positions to which the market risk rules may not be applied as set
forth in section 2(a) of appendix E to part 208) that are not eligible ABCP liquidity facilities are
to be considered recourse obligations or direct credit substitutes, and assessed the appropriate
risk-based capital treatment in accordance with section III.B.3. of this appendix.
*****
4. Items with a 10 percent conversion factor. a. Unused portions of eligible ABCP liquidity
facilities with an original maturity of one year or less are converted at 10 percent.
b. Banks that are subject to the market risk rules are required to convert the notional
amount of eligible ABCP liquidity facilities, in form or in substance, with an original maturity of
one year or less that are carried in the trading account at 10 percent to determine the appropriate
credit equivalent amount even though those facilities are structured or characterized as
derivatives or other trading book assets. Liquidity facilities that support ABCP, in form or in
substance, (including those positions to which the market risk rules may not be applied as set
forth in section 2(a) of appendix E of this part) that are not eligible ABCP liquidity facilities 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.
5. *** These include unused portions of commitments (with the exception of eligible ABCP
47 The sufficiency of collateral and guarantees for off-balance-sheet items is determined by the market value of the
collateral or the amount of the guarantee in relation to the face amount of the item, except for derivative
contracts, for which this determination is generally made in relation to the credit equivalent amount. Collateral
and guarantees are subject to the same provisions noted under section III.B of this appendix A.

28
liquidity facilities) 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. ***
*****
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 liquidity facilities that provide liquidity support to asset-backed commercial
paper. 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 made:
a. Section II.A.1.c. is revised.
b. Section III.B.3.a., Definitions, is revised.
c. Section III.B.6. is revised.
d. In section III.D –
i. The third sentence of the introductory paragraph is revised and the last
sentence is removed.
ii. In paragraph 2., Items with a 50 percent conversion factor, the fourth
undesignated paragraph is removed, the five remaining undesignated paragraphs are designated
as 2.a. through 2.e., and the newly designated paragraph 2.c. is revised.

54 [Reserved]

29
iii. Paragraph 4, Items with a zero percent conversion factor, is redesignated as
paragraph 5. and a new paragraph 4. is added.
iv. The first sentence in redesignated paragraph 5., 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 capital because, as a general rule, it represents equity that is freely available to absorb
losses in operating subsidiaries whose assets are included in a banking organization’s riskweighted 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 (ABCP) (as defined in section III.B.6. of
this appendix A) 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. ***
3. ***
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

30
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. Creditenhancing representations and warranties do not include:
1. Early default clauses and similar warranties that permit the return of, or premium
refund clauses covering, 1-4 family residential first mortgage loans that qualify for a 50 percent
risk weight for a period not to exceed 120 days from the date of transfer. These warranties may
cover only those loans that were originated within 1 year of the date of transfer;
2. Premium refund clauses that cover assets guaranteed, in whole or in part, by the U.S.
Government, a U.S. Government agency or a government-sponsored enterprise, provided the
premium refund clauses are for a period not to exceed 120 days from the date of transfer; or
3. Warranties that permit the return of assets in instances of misrepresentation, fraud or
incomplete documentation.
iii. Direct credit substitute means an arrangement in which a bank holding company
assumes, in form or in substance, credit risk associated with an on- or off-balance sheet credit
exposure that was not previously owned by the bank holding company (third-party asset) and the
risk assumed by the bank holding company exceeds the pro rata share of the bank holding
company's interest in the third-party asset. If the bank holding company has no claim on the
third-party asset, then the bank holding company's assumption of any credit risk with respect to
the third party asset is a direct credit substitute. Direct credit substitutes include, but are not
limited to:
1. Financial standby letters of credit that support financial claims on a third party that
exceed a bank holding company's pro rata share of losses in the financial claim;
2. Guarantees, surety arrangements, credit derivatives, and similar instruments backing
financial claims that exceed a bank holding company's pro rata share in the financial claim;
3. Purchased subordinated interests or securities that absorb more than their pro rata share
of losses from the underlying assets;
4. Credit derivative contracts under which the bank holding company assumes more than
its pro rata share of credit risk on a third party exposure;
5. Loans or lines of credit that provide credit enhancement for the financial obligations of
an account party;
6. Purchased loan servicing assets if the servicer is responsible for credit losses or if the
servicer makes or assumes credit-enhancing representations and warranties with respect to the
loans serviced. Mortgage servicer cash advances that meet the conditions of section
III.B.3.a.viii. of this appendix are not direct credit substitutes;
7. Clean-up calls on third party assets. Clean-up calls that are 10 percent or less of the

31
original pool balance that are exercisable at the option of the bank holding company are not
direct credit substitutes; and
8. Liquidity facilities that provide liquidity support to ABCP (other than eligible ABCP
liquidity facilities).
iv. Eligible ABCP liquidity facility means a liquidity facility supporting ABCP, in form
or in substance, that is subject to an asset quality test at the time of draw that precludes funding
against assets that are 90 days or more past due or in default. In addition, if the assets that an
eligible ABCP liquidity facility is required to fund against are externally rated assets or
exposures at the inception of the facility, the facility can be used to fund only those assets or
exposures that are externally rated investment grade at the time of funding. Notwithstanding the
eligibility requirements set forth in the two preceding sentences, a liquidity facility will be
considered an eligible ABCP liquidity facility if the assets that are funded under the liquidity
facility and which do not meet the eligibility requirements are guaranteed, either conditionally or
unconditionally, by the U.S. government or its agencies, or by the central government of an
OECD country.
v. Externally rated means that an instrument or obligation has received a credit rating
from a nationally recognized statistical rating organization.
vi. Face amount means the notional principal, or face value, amount of an off-balance
sheet item; the amortized cost of an asset not held for trading purposes; and the fair value of a
trading asset.
vii. Financial asset means cash or other monetary instrument, evidence of debt, evidence
of an ownership interest in an entity, or a contract that conveys a right to receive or exchange
cash or another financial instrument from another party.
viii. Financial standby letter of credit means a letter of credit or similar arrangement that
represents an irrevocable obligation to a third-party beneficiary:
1. To repay money borrowed by, or advanced to, or for the account of, a second party
(the account party), or
2. To make payment on behalf of the account party, in the event that the account party
fails to fulfill its obligation to the beneficiary.
ix. Liquidity Facility means a legally binding commitment to provide liquidity support to
ABCP by lending to, or purchasing assets from, any structure, program, or conduit in the event
that funds are required to repay maturing ABCP.
x. Mortgage servicer cash advance means funds that a residential mortgage loan servicer
advances to ensure an uninterrupted flow of payments, including advances made to cover
foreclosure costs or other expenses to facilitate the timely collection of the loan. A mortgage
servicer cash advance is not a recourse obligation or a direct credit substitute if:
1. The servicer is entitled to full reimbursement and this right is not subordinated to other
claims on the cash flows from the underlying asset pool; or

32
2. For any one loan, the servicer's obligation to make nonreimbursable advances is
contractually limited to an insignificant amount of the outstanding principal balance of that loan.
xi. Nationally recognized statistical rating organization (NRSRO) means an entity
recognized by the Division of Market Regulation of the Securities and Exchange Commission
(or any successor Division) (Commission) as a nationally recognized statistical rating
organization for various purposes, including the Commission's uniform net capital requirements
for brokers and dealers.
xii. Recourse means the retention, by a bank holding company, in form or in substance,
of any credit risk directly or indirectly associated with an asset it has transferred and sold that
exceeds a pro rata share of the banking organization's claim on the asset. If a banking
organization has no claim on a transferred asset, then the retention of any risk of credit loss is
recourse. A recourse obligation typically arises when a bank holding company transfers assets
and retains an explicit obligation to repurchase the assets or absorb losses due to a default on the
payment of principal or interest or any other deficiency in the performance of the underlying
obligor or some other party. Recourse may also exist implicitly if a bank holding company
provides credit enhancement beyond any contractual obligation to support assets it has sold. The
following are examples of recourse arrangements:
1. Credit-enhancing representations and warranties made on the transferred assets;
2. Loan servicing assets retained pursuant to an agreement under which the bank holding
company will be responsible for credit losses associated with the loans being serviced. Mortgage
servicer cash advances that meet the conditions of section III.B.3.a.x. of this appendix are not
recourse arrangements;
3. Retained subordinated interests that absorb more than their pro rata share of losses
from the underlying assets;
4. Assets sold under an agreement to repurchase, if the assets are not already included on
the balance sheet;
5. Loan strips sold without contractual recourse where the maturity of the transferred loan
is shorter than the maturity of the commitment under which the loan is drawn;
6. Credit derivatives issued that absorb more than the bank holding company's pro rata
share of losses from the transferred assets;
7. Clean-up calls at inception that are greater than 10 percent of the balance of the
original pool of transferred loans. Clean-up calls that are 10 percent or less of the original pool
balance that are exercisable at the option of the bank holding company are not recourse
arrangements; and
8. Liquidity facilities that provide liquidity support to ABCP (other than eligible ABCP
liquidity facilities).
xiii. Residual interest means any on-balance sheet asset that represents an interest

33
(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 creditenhancing I/Os are residual interests for purposes of this appendix.
xiv. Risk participation means a participation in which the originating party remains liable
to the beneficiary for the full amount of an obligation (e.g., a direct credit substitute)
notwithstanding that another party has acquired a participation in that obligation.
xv. Securitization means the pooling and repackaging by a special purpose entity of
assets or other credit exposures into securities that can be sold to investors. Securitization
includes transactions that create stratified credit risk positions whose performance is dependent
upon an underlying pool of credit exposures, including loans and commitments.
xvi. Sponsor means a bank holding company that establishes an ABCP program;
approves the sellers permitted to participate in the program; approves the asset pools to be
purchased by the program; or administers the program by monitoring the assets, arranging for
debt placement, compiling monthly reports, or ensuring compliance with the program documents
and with the program's credit and investment policy.
xvii. Structured finance program means a program where receivable interests and assetbacked securities issued by multiple participants are purchased by a special purpose entity that
repackages those exposures into securities that can be sold to investors. Structured finance
programs allocate credit risks, generally, between the participants and credit enhancement
provided to the program.
xviii. Traded position means a position that is externally rated and is retained, assumed,
or issued in connection with an asset securitization, where there is a reasonable expectation that,
in the near future, the rating will be relied upon by unaffiliated investors to purchase the position;
or an unaffiliated third party to enter into a transaction involving the position, such as a purchase,
loan, or repurchase agreement.
*****
6. Asset-backed commercial paper programs. a. An asset-backed commercial paper
(ABCP) program means a program that primarily issues externally rated commercial paper
backed by assets or exposures held in a bankruptcy-remote, special purpose entity.
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 holding

34
company is the sponsor of the ABCP program. If a bank holding company excludes such
consolidated ABCP program assets, the bank holding company must assess the appropriate riskbased capital charge against any 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.
c. If a bank holding company has multiple overlapping exposures (such as a programwide credit enhancement and multiple pool-specific liquidity facilities) to an ABCP program that
is not consolidated for risk-based capital purposes, the bank holding company is not required to
hold duplicative risk-based capital under this appendix against the overlapping position. Instead,
the bank holding company should apply to the overlapping position the applicable risk-based
capital treatment that results in the highest capital charge.
*****
III. ***
D. *** The resultant credit equivalent amount is assigned to the appropriate risk
category according to the obligor or, if relevant, the guarantor, the nature of any collateral, or
external credit ratings.51
*****
2. Items with a 50 percent conversion factor. ***
c.i. 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 ABCP liquidity facilities, 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 weightedrisk 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.
ii. Banking organizations that are subject to the market risk rules are required to convert
the notional amount of eligible ABCP liquidity facilities, in form or in substance, with an
original maturity of over one year that are carried in the trading account at 50 percent to
determine the appropriate credit equivalent amount even though those facilities are structured or
characterized as derivatives or other trading book assets. Liquidity facilities that support ABCP,
in form or in substance, (including those positions to which the market risk rules may not be
applied as set forth in section 2(a) of appendix E of this part) that are not eligible ABCP liquidity
51 The sufficiency of collateral and guarantees for off-balance-sheet items is determined by the market value of the
collateral or the amount of the guarantee in relation to the face amount of the item, except for derivative
contracts, for which this determination is generally made in relation to the credit equivalent amount. Collateral
and guarantees are subject to the same provisions noted under section III.B of this appendix A.

35
facilities are to be considered recourse obligations or direct credit substitutes, and assessed the
appropriate risk-based capital treatment in accordance with section III.B.3. of this appendix.
*****
4. Items with a 10 percent conversion factor. a. Unused portions of eligible ABCP liquidity
facilities with an original maturity of one year or less also are converted at 10 percent.
b. Banking organizations that are subject to the market risk rules are required to convert
the notional amount of eligible ABCP liquidity facilities, in form or in substance, with an
original maturity of one year or less that are carried in the trading account at 10 percent to
determine the appropriate credit equivalent amount even though those facilities are structured or
characterized as derivatives or other trading book assets. Liquidity facilities that support ABCP,
in form or in substance, (including those positions to which the market risk rules may not be
applied as set forth in section 2(a) of appendix E of this part) that are not eligible ABCP liquidity
facilities 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.
5. *** These include unused portions of commitments (with the exception of eligible ABCP
liquidity facilities) 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 liquidity facilities that provide liquidity support to asset-backed
commercial paper. Such excluded positions are subject to the risk-based capital requirements set
forth in appendix A of this part.
*****

36
[THIS SIGNATURE PAGE RELATES TO THE JOINT FINAL RULE “RISK-BASED
CAPITAL GUIDELINES; CAPITAL ADEQUACY GUIDELINES; CAPITAL
MAINTENANCE; CONSOLIDATION OF ASSET-BACKED COMMERCIAL PAPER
PROGRAMS AND OTHER RELATED ISSUES”]

By order of the Board of Governors of the Federal Reserve System, July 19, 2004.

Jennifer J. Johnson (signed)
Jennifer J. Johnson
Secretary of the Board

37
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 amends 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. 102242, 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 made:
a. Section I.A.1. is revised.
b. Section II.B.5(a), Definitions, is revised.
c. Section II.B.6. is revised.
d. In section II.D –
i. The third sentence of the introductory paragraph is revised and the last
sentence is removed;
ii. In paragraph 2., Items With a 50 Percent Conversion Factor, the five
undesignated paragraphs are designated as 2.a. through 2.e., the newly designated paragraph 2.c.
is revised, and the second sentence of the newly designated paragraph 2.d. is revised;
iii. Paragraph 4., Items With a Zero Percent Conversion Factor, is redesignated as
paragraph 5. and a new paragraph 4., Items With a 10 Percent Conversion Factor, is added; and
iv. The first sentence in redesignated paragraph 5., 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. ***

38
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
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 § 325.5(f)),3 minus creditenhancing interest-only strips that are not eligible for inclusion in core capital pursuant to §
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.
(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 creditenhancing 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. Creditenhancing 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 § 325.5(f) and (g) of this part will not be recognized for
risk-based capital purposes.

2

3

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.
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.

39
(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 (ABCP) 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 § 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. Creditenhancing 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.
(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 thirdparty 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:

40
(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 similar instruments backing
financial claims;
(iii) Purchased subordinated interests or securities that absorb more than their pro rata
share of credit losses from the underlying assets;
(iv) Credit derivative contracts 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;
(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; and
(viii.) Liquidity facilities that provide liquidity support to ABCP (other than eligible
ABCP liquidity facilities).
(5) Eligible ABCP liquidity facility means a liquidity facility supporting ABCP, in form
or in substance, that is subject to an asset quality test at the time of draw that precludes funding
against assets that are 90 days or more past due or in default. In addition, if the assets that an
eligible ABCP liquidity facility is required to fund against are externally rated assets or
exposures at the inception of the facility, the facility can be used to fund only those assets or
exposures that are externally rated investment grade at the time of funding. Notwithstanding the
eligibility requirements set forth in the two preceding sentences, a liquidity facility will be
considered an eligible ABCP liquidity facility if the assets that are funded under the liquidity
facility and which do not meet the eligibility requirements are guaranteed, either conditionally or
unconditionally, by the U.S. government or its agencies, or by the central government of an
OECD country.
(6) Externally rated means that an instrument or obligation has received a credit rating
from a nationally recognized statistical rating organization.

41
(7) 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.
(8) 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.
(9) 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.
(10) Liquidity facility means a legally binding commitment to provide liquidity support
to ABCP by lending to, or purchasing assets from, any structure, program, or conduit in the event
that funds are required to repay maturing ABCP.
(11) Mortgage servicer cash advance means funds that a residential mortgage 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:
(i) The mortgage 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
(ii) For any one loan, the servicer’s obligation to make nonreimbursable advances is
contractually limited to an insignificant amount of the outstanding principal of that loan.
(12) 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).
(13) 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;

42
(ii) Loan servicing assets retained pursuant to an agreement under which the bank:
(A) Is responsible for losses associated with the loans being serviced, or
(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)(11) of this Appendix A).
(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;
(vii) 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; and
(viii.) Liquidity facilities that provide liquidity support to ABCP (other than eligible
ABCP liquidity facilities).
(14) 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 (GAAP)) 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 from a third
party, except that purchased credit-enhancing I/Os are residual interests for purposes of the riskbased capital treatment in this appendix.
(15) 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.
(16) 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

43
upon an underlying pool of credit exposures, including loans and commitments.
(17) Sponsor means a bank that establishes an ABCP program; approves the sellers
permitted to participate in the program; approves the asset pools to be purchased by the program;
or administers the ABCP 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.
(18) Structured finance program means a program where receivable interests and assetbacked 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.
(19) 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.
*****
6. Asset-backed commercial paper programs. a. An asset-backed commercial paper
(ABCP) program means a program that primarily issues externally rated commercial paper
backed by assets or other exposures held in a bankruptcy-remote, special purpose entity.
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
ABCP program. If a bank excludes such consolidated ABCP program assets, the bank must
assess the appropriate risk-based capital charge against any 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.
c. If a bank has multiple overlapping exposures (such as a program-wide credit
enhancement and multiple pool-specific liquidity facilities) to an ABCP program that is not
consolidated for risk-based capital purposes, the bank is not required to hold capital under
duplicative risk-based capital requirements under this appendix against the overlapping position.
Instead, the bank should apply to the overlapping position the applicable risk-based capital
treatment that results in the highest capital charge.
*****
II. ***
D.
*** The resultant credit equivalent amount is assigned to the appropriate risk category
according to the obligor or, if relevant, the guarantor, the nature of any collateral, or external credit

44
ratings.45
*****
2. Items With a 50 Percent Conversion Factor. ***
*****
c.i. Commitments 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 ABCP liquidity facilities, 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 weightedrisk 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.
ii. Banks that are subject to the market risk rules in appendix C to part 325 are required
to convert the notional amount of eligible ABCP liquidity facilities, in form or in substance, with
an original maturity of over one year that are carried in the trading account at 50 percent to
determine the appropriate credit equivalent amount even though those facilities are structured or
characterized as derivatives or other trading book assets. Liquidity facilities that support ABCP,
in form or in substance, (including those positions to which the market risk rules may not be
applied as set forth in section 2(a) of appendix C of this part) that are not eligible ABCP liquidity
facilities are to be considered recourse obligations or direct credit substitutes, and assessed the
appropriate risk-based capital treatment in accordance with section II.B.5. of this appendix.
d. ***
Thus, after a commitment has been converted at 50 percent, portions of commitments that have
been conveyed to other U.S. depository institutions or OECD banks, but for which the
originating bank retains the full obligation to the borrower if the participating bank fails to pay
when the commitment is drawn upon, will be assigned to the 20 percent risk category.
*****
4. Items With a 10 Percent Conversion Factor. a. Unused portions of eligible ABCP liquidity
facilities with an original maturity of one year or less that provide liquidity support to ABCP also
are converted at 10 percent.
b. Banks that are subject to the market risk rules in appendix C to part 325 are required
to convert the notional amount of eligible ABCP liquidity facilities, in form or in substance, with
an original maturity of one year or less that are carried in the trading account at 10 percent to
45 The sufficiency of collateral and guarantees for off-balance-sheet items is determined by the market value of the
collateral or the amount of the guarantee in relation to the face amount of the item, except for derivative
contracts, for which this determination is generally made in relation to the credit equivalent amount. Collateral
and guarantees are subject to the same provisions noted under section II.B of this appendix A.

45
determine the appropriate credit equivalent amount even though those facilities are structured or
characterized as derivatives or other trading book assets. Liquidity facilities that provide
liquidity support to ABCP, in form or in substance, (including those positions to which the
market risk rules may not be applied as set forth in section 2(a) of appendix C of this part) that
are not eligible ABCP liquidity facilities 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.
5. Items with a Zero Percent Conversion Factor. These include unused portions of
commitments, with the exception of eligible ABCP liquidity facilities, 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 liquidity facilities that provide liquidity support to asset-backed commercial
paper. Such excluded positions are subject to the risk-based capital requirements set forth in
appendix A of this part.
*****

46
[THIS SIGNATURE PAGE RELATES TO THE JOINT FINAL RULE “RISK-BASED
CAPITAL GUIDELINES; CAPITAL ADEQUACY GUIDELINES; CAPITAL
MAINTENANCE: CONSOLIDATION OF ASSET-BACKED COMMERCIAL PAPER
PROGRAMS AND OTHER RELATED ISSUES”]

By order of the Board of Directors.
Dated at Washington, DC, this 28th day of June 2004.
Federal Deposit Insurance Corporation.
Valerie J. Best (signed)
Valerie J. Best
Assistant Executive Secretary.
(SEAL)

47
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 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. Amend § 567.1 by:
A. Revising the definition of an asset-backed commercial paper program;
B. Revising the definition of commitment;
C. Revising paragraphs (6) and (7) and adding a new paragraph (8) to the definition of
direct credit substitute;
D. Adding a definition of eligible ABCP liquidity facility;
E. Adding a definition of liquidity facility; and
F. Revising paragraphs (6) and (7) and adding a new paragraph (8) to the definition of
recourse:
§ 567.1 Definitions
*****
Asset-backed commercial paper program. The term asset-backed commercial paper
program (ABCP program) means a program that primarily issues commercial paper that has
received a credit rating from an NRSRO and that is backed by assets or other exposures held in a
bankruptcy-remote special purpose entity. The term sponsor of an ABCP program means a
savings association that:
(1) Establishes an ABCP program;
(2) Approves the sellers permitted to participate in an ABCP program;
(3) Approves the asset pools to be purchased by an ABCP program; or
(4) Administers the ABCP program by monitoring the assets, arranging for debt
placement, compiling monthly reports, or ensuring compliance with the program

48
documents and with the program's credit and investment policy.
*****
Commitment. The term commitment means any arrangement that obligates a savings
association to:
(1) Purchase loans or securities;
(2) Extend credit in the form of loans or leases, participations in loans or leases, overdraft
facilities, revolving credit facilities, home equity lines of credit, eligible ABCP liquidity
facilities, or similar transactions.
*****
Direct credit substitute. * * *
(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. Servicer cash advances as defined in this section are not direct credit substitutes;
(7) Clean-up calls on third party assets. However, clean-up calls that are 10 percent or
less of the original pool balance and that are exercisable at the option of the savings association
are not direct credit substitutes; and
(8) Liquidity facilities that provide support to asset-backed commercial paper (other than
eligible ABCP liquidity facilities).
Eligible ABCP liquidity facility. The term eligible ABCP liquidity facility means a
liquidity facility that supports asset-backed commercial paper, in form or in substance, and that
meets the following criteria:
(1)(i) At the time of the draw, the liquidity facility must be subject to an asset quality test
that precludes funding against assets that are 90 days or more past due or in default; and
(ii) If the assets that the liquidity facility is required to fund against are assets or
exposures that have received a credit rating by a NRSRO at the time the inception of the facility,
the facility can be used to fund only those assets or exposures that are rated investment grade by
an NRSRO at the time of funding; or
(2) If the assets that are funded under the liquidity facility do not meet the criteria
described in paragraph (1) of this definition, the assets must be guaranteed, conditionally or
unconditionally, by the United States Government, its agencies, or the central government of an
OECD country.
*****
Liquidity facility. The term liquidity facility means a legally binding commitment to
provide liquidity support to asset-backed commercial paper by lending to, or purchasing assets
from any structure, program or conduit in the event that funds are required to repay maturing
asset-backed commercial paper.

49
*****
Recourse. ***
(6) Credit derivatives that absorb more than the savings association’s pro rata share of
losses from the transferred assets;
(7) Clean-up calls on assets the savings association has sold. However, clean-up calls
that are 10 percent or less of the original pool balance and that are exercisable at the option of the
savings association are not recourse arrangements; and
(8) Liquidity facilities that provide support to asset-backed commercial paper (other than
eligible ABCP liquidity facilities).
*****
3. Amend § 567.5 by revising paragraph (a)(1)(iii) to read as follows:
§ 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 savings association excludes
the consolidated assets of such programs from risk-weighted assets pursuant to § 567.6(a)(3);
*****
4. Amend § 567.6 by:
A. Revising paragraph (a)(2)(ii)(B);
B. Redesignating paragraphs (a)(2)(iv) and (a)(2)(v) as paragraphs (a)(2)(v) and
(vi), respectively;
C. Adding paragraph (a)(2)(iv);
D. Revising redesignated paragraph (a)(2)(v)(A);
E. Revising the heading to redesignated paragraph (a)(2)(vi), and revising the
references to paragraph (a)(2)(v) in that redesignated paragraph to refer to
paragraph (a)(2)(vi);
F. Revising paragraph (a)(3); and
G. Deleting paragraph (a)(4).

50
§ 567.6 Risk-based capital credit risk-weight categories.
(a) ***
(2) ***
(ii) ***
(B) Unused portions of commitments (including home equity lines of credit and eligible
ABCP liquidity facilities) with an original maturity exceeding one year except those listed in
paragraph (a)(2)(v) of this section. For eligible ABCP liquidity facilities, the resulting credit
equivalent amount is assigned to the risk category appropriate to the assets to be funded by the
liquidity facility based on the assets or the obligor, after considering any collateral or guarantees,
or external credit ratings under paragraph (b)(3) of this section, if applicable; and
*****
(iv) 10 percent credit conversion factor (Group D). Unused portions of eligible ABCP
liquidity facilities with an original maturity of one year or less. The resulting credit equivalent
amount is assigned to the risk category appropriate to the assets to be funded by the liquidity
facility based on the assets or the obligor, after considering any collateral or guarantees, or
external credit ratings under paragraph (b)(3) of this section, if applicable;
(v) Zero percent credit conversion factor (Group E). (A) Unused portions of
commitments with an original maturity of one year or less, except for eligible ABCP liquidity
facilities.
(vi) Off-balance sheet contracts; interest rate and foreign exchange rate contracts (Group
F). ***
*****
(3) Asset-backed commercial paper programs. (i) A savings association that qualifies as
a primary beneficiary and must consolidate an ABCP program that is a variable interest entity
under generally accepted accounting principles may exclude the consolidated ABCP program
assets from risk-weighted assets if the savings association is the sponsor of the ABCP program.
(ii) If a savings association excludes such consolidated ABCP program assets from riskweighted assets, the savings association must assess the appropriate risk-based capital
requirement against any exposures of the savings association arising in connection with such
ABCP programs, including direct credit substitutes, recourse obligations, residual interests,
liquidity facilities, and loans, in accordance with paragraphs (a)(1) and (2) and (b) of this section.
(iii) If a savings association bank has multiple overlapping exposures (such as a programwide credit enhancement and a liquidity facility) to an ABCP program that is not consolidated
for risk-based capital purposes, the savings association is not required to hold duplicative riskbased capital under this part against the overlapping position. Instead, the savings association
should apply to the overlapping position the applicable risk-based capital treatment that results in
the highest capital charge.

51
*****
[THIS SIGNATURE PAGE RELATES TO THE JOINT FINAL RULE “RISK-BASED
CAPITAL GUIDELINES; CAPITAL ADEQUACY GUIDELINES; CAPITAL
MAINTENANCE; CONSOLIDATION OF ASSET-BACKED COMMERCIAL PAPER
PROGRAMS AND OTHER RELATED ISSUES”]

Dated June 24, 2004
BY THE OFFICE OF THRIFT SUPERVISION

James E. Gilleran (signed)
James E. Gilleran
Director