Comptroller of the Currency, Fed, and FDIC Revises Eligible Guarantee Definition

Targeted News Service

WASHINGTON, Aug. 1 -- The U.S. Comptroller of the Currency, the Federal Reserve System, and the Federal Deposit Insurance Corporation published the following rule in the Federal Register:

Regulatory Capital Rules: Advanced Approaches Risk-Based Capital Rule, Revisions to the Definition of Eligible Guarantee

A Rule by the Comptroller of the Currency, the Federal Reserve System, and the Federal Deposit Insurance Corporation on 07/30/2014

Publication Date: Wednesday, July 30, 2014

Agencies: Federal Deposit Insurance Corporation

Federal Reserve System

Office of the Comptroller of the Currency

Department of Treasury

Dates: This rule is effective on October 1, 2014. Any company subject to the rule may elect to adopt it before this date.

Effective Date: 10/01/2014

Entry Type: Rule

Action: Final rule.

Document Citation: 79 FR 44120

Page: 44120 -44125 (6 pages)

CFR: 12 CFR 217

12 CFR 324

12 CFR 3

Agency/Docket Numbers: Docket ID OCC-2014-0012

Regulation Q

Docket No. R-1488

RIN: 1557-AD83

3064-AE13

7100-AE17

Document Number: 2014-17858

Shorter URL: https://federalregister.gov/a/2014-17858

Action

Final Rule.

Summary

The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) are adopting a final rule that revises the definition of eligible guarantee in the agencies' advanced approaches risk-based capital rule, adopted in the agencies' July 2013 regulatory capital rule (2013 capital rule). The final rule removes the requirement that an eligible guarantee be made by an eligible guarantor for purposes of calculating the risk-weighted assets of an exposure (other than a securitization exposure) under the advanced approaches risk-based capital rule as incorporated into the 2013 capital rule (advanced approaches). The change to the definition of eligible guarantee applies to all banks, savings associations, bank holding companies, and savings and loan holding companies that are subject to the advanced approaches.

DATES:

This rule is effective on October 1, 2014. Any company subject to the rule may elect to adopt it before this date.

FOR FURTHER INFORMATION CONTACT:

OCC: Margot Schwadron, Senior Risk Expert; or Roger Tufts, Senior Economic Advisor, Capital Policy, (202) 649-6370; or Carl Kaminski, Counsel, Legislative and Regulatory Activities Division, (202) 649-5490, for persons who are deaf or hard of hearing, TTY, (202) 649-5597, Office of the Comptroller of the Currency, 400 7th Street SW., Washington, DC 20219.

Board: Anna Lee Hewko, Deputy Associate Director, (202) 530-6260; Constance M. Horsley, Assistant Director, (202) 452-5239; Thomas Boemio, Manager, (202) 452-2982; Andrew Willis, Supervisory Financial Analyst, (202) 912-4323; or Justyna Milewski, Financial Analyst, (202) 452-3607, Capital and Regulatory Policy, Division of Banking Supervision and Regulation; or Benjamin McDonough, Senior Counsel, (202) 452-2036; April C. Snyder, Senior Counsel, (202) 452-3099; Christine Graham, Counsel, (202) 452-3005; or Mark Buresh, Attorney, (202) 452-5270, Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW., Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263-4869.

FDIC: Bobby R. Bean, Associate Director, [email protected]; Ryan Billingsley, Chief, Capital Policy Section, [email protected]; Benedetto Bosco, Capital Markets Policy Analyst, [email protected], Capital Markets Branch, Division of Risk Management Supervision, [email protected] or (202) 898-6888; or Michael Phillips, Counsel, [email protected]; Rachel Ackmann, Senior Attorney, [email protected]; or Grace Pyun, Senior Attorney, [email protected], Supervision Branch, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

On May 1, 2014, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) published in the Federal Register a joint notice of proposed rulemaking (NPR or proposed rule) [1] seeking public comment on revisions to the definition of eligible guarantee for purposes of calculating the risk-weighted assets of an exposure (other than a securitization exposure) under the advanced approaches risk-based capital rule as incorporated into subpart E (advanced approaches) of the agencies' July 2013 regulatory capital rule (2013 capital rule). [2]

Among other changes, the 2013 capital rule amended the methodologies for calculating risk-weighted assets under the advanced approaches, as well as the standardized approach for regulatory capital in subpart D (standardized approach) of the 2013 capital rule, which is generally consistent with the methodologies for calculating risk-weighted assets established by the Basel Committee on Banking Supervision (BCBS) through its international framework. [3] Specifically, the 2013 capital rule included a definition of "eligible guarantee" for purposes of both the standardized approach and the advanced approaches and introduced a definition of "eligible guarantor."

The definition of eligible guarantee provided that an eligible guarantee could be provided only by an eligible guarantor. The definition of eligible guarantor includes a sovereign, the Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Commission, a Federal Home Loan Bank, the Federal Agricultural Mortgage Corporation (Farmer Mac), a multilateral development bank (MDB), a depository institution, a bank holding company, a savings and loan holding company, a credit union, a foreign bank, and a qualifying central counterparty. The definition of eligible guarantor also includes an entity (other than a special purpose entity) that at the time the guarantee is issued or anytime thereafter, has issued and has outstanding an unsecured debt security that is investment grade; whose creditworthiness is not positively correlated with the credit risk of the exposures for which it has provided guarantees; and that is not an insurance company engaged predominately in the business of providing credit protection (such as a monoline bond insurer or re-insurer).

Following the release of the 2013 capital rule, the agencies received comments raising concerns about the definition of eligible guarantee. Commenters noted that the revisions made to the definition of eligible guarantee changed the recognition of these guarantees for certain exposures under the advanced approaches wholesale framework. For example, several advanced approaches banking organizations [4] observed that middle market and commercial real estate loans often involve guarantors that do not meet the definition of eligible guarantor. The guarantors for such transactions are often related parties such as owners or sponsors that have not issued investment grade debt securities. These commenters argued that such guarantees provide valuable credit risk mitigation that should be recognized under the advanced approaches capital requirements.

As explained in the proposal, the agencies did not intend for the revisions to the definition of eligible guarantee in the 2013 capital rule to prevent advanced approaches banking organizations from recognizing the risk-mitigation benefits of the aforementioned types of guarantees. The agencies believe that these guarantees should continue to qualify as credit risk mitigants for purposes of the advanced approaches because they provide banking organizations with credit enhancement with respect to their exposures.

On May 1, 2014, the agencies published in the Federal Register, a proposed rule to effectively revert to the previous treatment of eligible guarantees under the 2007 advanced approaches final rule [5] for non-securitization exposures. [6] Under the proposal, the requirement that an eligible guarantee be provided by an eligible guarantor for exposures that are not securitizations for the purpose of the advanced approaches would be removed from the definition of eligible guarantee. However, the proposed rule would have retained the definition of eligible guarantee in the 2013 capital rule for purposes of calculating risk-weighted assets under the standardized approach because the standardized approach generally assigns a single risk weight to exposures to most corporate borrowers and guarantors and does not incorporate the definition of eligible guarantee into a risk-sensitive methodology like the advanced approaches.

[*Federal RegisterVJ 2014-07-30]

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