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Subject: Interagency Guidance for Determination of Risk-Based Capital for Unrated Direct Credit Substitutes Extended to Asset-Backed Commercial Paper Programs
Date: April 13, 2005
To: Chief Executive Officers of All National Banks, Department and Division Heads, and All Examining Personnel
Description: Asset-Backed Commercial Paper
The guidance attached to this bulletin continues to apply to federal savings associations.
The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision (agencies) jointly issued the attached interagency guidance on March 30, 2005. The guidance is applicable to banks using the internal ratings approach as outlined in the agencies' capital rules for determining the capital charge for unrated direct credit substitutes provided to ABCP programs.1 The provisions included in this policy statement are effective immediately.
The capital rules permit banking organizations with qualifying internal risk rating systems to use internal ratings applied to their unrated direct credit substitutes extended to ABCP programs in determining the appropriate amount of regulatory capital. The rules set forth nine key criteria for assessing the adequacy of a bank's internal credit risk rating system. The guidance provides additional information for bankers and procedures for examiners to use in assessing whether a bank's internal risk rating system is adequate and reasonably corresponds to the external rating categories set forth in the agencies' risk-based capital guidelines.
The guidance also introduces the "weakest link" approach for calculating the risk-based capital requirement applicable to a program-wide credit enhancement. This approach assumes that the risk of the program-wide credit enhancement is directly dependent on the quality, i.e., the internal rating, of the riskiest asset pools purchased by the ABCP program.
Questions regarding this interagency guidance or other policy issues related to ABCP activities may be directed to Michael Drennan, director for Treasury and Market Risk at (202) 874-5670. Greg Coleman or Kelly Ballard can provide technical assistance at the same number.
Kathryn E. Dick
1 On November 29, 2001, the Agencies amended their risk-based capital standards by adopting a new capital framework for banking organizations engaged in securitization activities ("Securitization Capital Rule" or the "Rule"). See 12 CFR 3, appendix A, Section 4. The minimum risk weight available under the internal risk ratings approach is 100 percent for an investment grade exposure, even if the direct credit substitute is highly rated internally, e.g., AAA. Direct credit substitutes internally rated one category below investment grade (e.g., BB+ through BB-) would be assigned to the 200 percent risk weight, whereas those internally rated more than one category below investment grade (e.g., below BB-) would receive the "gross-up" treatment. The application of the "gross-up" treatment, in many cases, will result in an effective dollar-for-dollar capital charge on direct credit substitutes that have ratings below BB-.