Federal Register: December 26, 2006 (Volume 71, Number 247)
DOCID: FR Doc 06-9738
DEPARTMENT OF THE TREASURY
CFR Citation: 12 CFR Part 3
Docket ID: [Docket No. 06-15]
RIN ID: RIN 1557-AC95
NOTICE: Part II
DOCUMENT ACTION: Joint notice of proposed rulemaking.
FEDERAL RESERVE SYSTEM
DATES: Comments on this joint notice of proposed rulemaking must be received by March 26, 2007.
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 proposing revisions to the existing riskbased capital framework that would enhance its risk sensitivity without unduly increasing regulatory burden. These changes would apply to banks, bank holding companies, and savings associations (banking organizations). A banking organization would be able to elect to adopt these proposed revisions or remain subject to the Agencies' existing riskbased capital rules, unless it uses the Advanced Capital Adequacy Framework proposed in the notice of proposed rulemaking published on September 25, 2006 (Basel II NPR).
In this notice of proposed rulemaking (NPR or Basel IA), the Agencies are proposing to expand the number of risk weight categories, allow the use of external credit ratings to risk weight certain exposures, expand the range of recognized collateral and eligible guarantors, use loantovalue ratios to risk weight most residential mortgages, increase the credit conversion factor for certain commitments with an original maturity of one year or less, assess a charge for early amortizations in securitizations of revolving exposures, and remove the 50 percent limit on the risk weight for certain derivative transactions. A banking organization would have to apply all the proposed changes if it chose to use these revisions.
Finally, in Section III of this NPR, the Agencies seek further comment on possible alternatives for implementing the ``International Convergence of Capital Measurement and Capital Standards: A Revised Framework'' (Basel II) in the United States as proposed in the Basel II NPR.
Federal Deposit Insurance Corporation; Federal Reserve System; Treasury Department, Comptroller of the Currency; Treasury Department, Thrift Supervision Office,
DOCUMENT BODY 2:
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R1238]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 567
RiskBased Capital Guidelines; Capital Adequacy Guidelines; Capital Maintenance: Domestic Capital Modifications
In 1989, 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) implemented a riskbased capital framework
for U.S. banking organizations.\1\ The Agencies based the framework on
the ``International Convergence of Capital Measurement and Capital
Standards'' (Basel I), published by the Basel Committee on Banking
Supervision (Basel Committee) in 1988.\2\ Basel I addressed certain
weaknesses in the various regulatory capital regimes that were in force
in most of the world's major banking jurisdictions. In the United
States, the Basel Ibased framework established a uniform regulatory
capital system that captured some of the risks not otherwise captured
by the regulatory capital to total assets ratio, provided some modest
differentiation of regulatory capital based on broadly defined risk
weight categories, and encouraged banking organizations to strengthen their capital positions.
\1\ 12 CFR part 3, appendix A (OCC); 12 CFR parts 208 and 225, appendix A (Board); 12 CFR part 325, appendix A (FDIC); and 12 CFR part 567 (OTS). The riskbased capital rules generally do not apply to bank holding companies with less than $500 million in assets. 71 FR 9897 (Februray 28, 2006).
\2\ The Basel Committee on Banking Supervision was established in 1974 by central banks and governmental authorities with bank supervisory responsibilities. Current member countries are Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United States.
Consistent with Basel I, the Agencies' existing riskbased capital
rules generally assign each credit exposure to one of five broad categories of credit risk, which allows for only limited
differentiation in the assessment of credit risk for most exposures. Since the implementation of Basel Ibased capital rules, the Agencies have made numerous revisions to these rules in response to changes in financial market practices and accounting standards as well as to implement legislative mandates and address safety and soundness issues. Over time, these revisions have modestly increased the degree of risk sensitivity of the Agencies' riskbased capital rules. The Agencies and the industry generally agree that the existing riskbased capital rules could be modified to better reflect the risks present in many banking organizations' portfolios without imposing undue regulatory burden. In recent years, however, the Agencies have limited modifications to the existing riskbased capital rules while international efforts to create a new riskbased capital framework were in process.
In June 2004, the Basel Committee introduced a new, more risk
sensitive capital adequacy framework, ``International Convergence of
Capital Measurement and Capital Standards: A Revised Framework'' (Basel
II).\3\ Basel II is designed to promote improved risk measurement and
management processes and better align minimum capital requirements with
risk. For credit risk, Basel II includes three approaches for
regulatory capital: Standardized, foundation internal ratingsbased,
and advanced internal ratingsbased. For operational risk, Basel II also includes three methodologies:
Basic indicator, standardized, and advanced measurement.
\3\ The complete text for Basel II as amended in November 2005 is available on the Bank for International Settlements Web site at http://www.bis.org/publ/bcbs118.htm.
In August 2003, the Agencies issued an advance notice of proposed
rulemaking (Basel II ANPR), which explained how the Agencies might
implement Basel II in the United States.\4\ On September 25, 2006, the
Agencies issued a notice of proposed rulemaking that provides the
industry with a more definitive proposal for implementing Basel II in the United States (Basel II NPR).\5\
\4\ As stated in its preamble, the Base II ANPR was based on the consultative document ``The New Basel Capital Accord'' that was published by the Basel Committee on April 29, 2003. The Basel II ANPR anticipated the issuance of a final revised accord. See 68 FR 45900 (August 4, 2003).
\5\ 71 FR 55380 (September 25, 2006). The Basel II NPR would add new appendices to the Agencies' existing capital regulations. These new appendices would be found at 12 CFR Part 3, Appendix C (OCC); 12 CFR Part 208, Appendix F and 12 CFR Part 225, Appendix F (FRB); 12 CFR Part 325, Appendix D (FDIC); and 12 CFR part 566, subpart A (OTS).
The Basel II NPR identifies two types of U.S. banking organizations that would use the Basel II rules: Those for which application of the rules would be mandatory (core banks), and those that might voluntarily apply the rules (optin banks) (collectively referred to as Basel II banking organizations). In general, the Basel II NPR defines a core bank as a banking organization that has consolidated total assets of $250 billion or more, has consolidated onbalance sheet foreign exposure of $10 billion or more, or is a subsidiary of a Basel II banking organization. The Basel II NPR presents the advanced internal ratingsbased approach for credit risk and the advanced measurement approach for operational risk. However, the Agencies did seek comment in the Basel II NPR on whether U.S. banking organizations subject to the advanced approaches in the proposed rule (that is, core banks and optin banks) should be permitted to use other credit and operational risk approaches provided for in Basel II. The Agencies are seeking further comment on possible alternatives for Basel II banking organizations in Section III of this NPR.
The complexity and cost associated with implementing Basel II in the United States effectively limit its application to those banking organizations that are able to take advantage of economies of scale and absorb the costs associated with the enhanced risk management practices required of Basel II banking organizations. Thus, the implementation of Basel II would create a bifurcated regulatory capital framework in the United States: One set of rules for Basel II banking organizations, and another for banking organizations that do not use the proposed Basel II capital rules (nonBasel II banking organizations).
In comments responding to the Basel II ANPR, Congressional testimony, and other industry communications, several banking organizations, trade associations, and others raised concerns about the competitive effects of a bifurcated regulatory framework on community and regional banking organizations. Among other broad concerns, these commenters asserted that implementing the Basel II capital regime in the United States could result in lower minimum regulatory capital requirements for Basel II banking organizations with respect to certain types of credit exposures. As a result, regulatory capital requirements for similar products could differ depending on the capital regime under which a banking organization operates. Community and regional banking organizations asserted that this would put them at a competitive disadvantage.
To assist in quantifying the potential effects of implementing
Basel II in the United States, the Agencies conducted a quantitative
impact study during late 2004 and early 2005 (QIS 4).\6\ QIS 4 was a
comprehensive survey completed on a best efforts basis by 26 of the
largest U.S. banking organizations using their own internal estimates
of the key risk parameters driving the capital requirements under the
Basel II framework. The results of the study suggested that the
aggregate minimum riskbased capital requirements for the 26 banking
organizations could drop approximately 15.5 percent relative to the
existing Basel Ibased framework. The QIS 4 results also indicated
dispersion in capital requirements across banking organizations and
portfolios, which was attributed in part to differences in the
underlying data and methodologies used by banking organizations to
quantify risk and their overall readiness to implement a Basel II
framework. The Basel II NPR contains several provisions designed to
limit potential reductions in minimum regulatory capital, such as an
extended transition period during which the Agencies can thoroughly
review those Basel II systems that are subject to supervisory oversight.
\6\ ``Summary Findings of the Fourth Quantitative Impact Study,'' Joint Agency press release, February 24, 2006.
On October 20, 2005, the Agencies issued an advanced notice of proposed rulemaking soliciting public comment on possible revisions to U.S. riskbased capital rules that would apply to nonBasel II banking organizations (Basel IA ANPR).\7\ The proposals in this NPR are based on those initial conceptual approaches and take into consideration the public comments that the Agencies received.
\7\ 70 FR 61068 (October 20, 2005).
Together, the Agencies received 73 public comments from banking, trade, and other organizations and individuals. Generally, most commenters supported the Agencies' goal to make the riskbased capital rules more risksensitive. Several larger banking organizations and industry groups favored increased risk sensitivity, but argued that many of the proposed revisions should be optional so that banking organizations may weigh the costs and benefits of using the revisions. Several nonBasel II banking organizations and industry groups argued that the U.S. riskbased capital rules should allow banking organizations to use internal assessments of risk to determine their capital requirements. A few commenters endorsed a proposal for a four tier capital framework that would apply different approaches to banking organizations based on the size and complexity, and the robustness of a banking organization's internal ratings systems. The commenters' proposal included an approach that would permit some nonBasel II banking organizations to use internal ratingbased systems.
One commenter suggested tying Basel IA capital requirements directly to the aggregate results for Basel II calculations. This commenter suggested that Basel IA capital charges should link by loan category to the average riskbased capital requirements of the Basel II banking organizations for that loan category, plus a small premium to recognize the substantial costs of implementing Basel II.
Most smaller and midsize banking organizations generally requested that any changes to the existing capital rules be simple and not require large data gathering and monitoring expenses. A number of the smallest banking organizations said that they do not wish to have any changes in the capital rules that apply to them. They noted that they already hold significantly more regulatory capital than the Agencies' riskbased capital rules require and, therefore, amending the rules would have little or no effect.
This NPR makes a number of proposals that should improve the risk
sensitivity of the existing riskbased capital rules. The Agencies,
however, are not proposing to allow a nonBasel II banking organization to use internal risk ratings or to use its internal risk
measurement processes to calculate riskbased capital requirements for any new categories of exposures.\8\ The Agencies believe that the use of these internal ratings and measurement processes should require the systems controls, supervisory oversight, and other qualification requirements that are proposed in the Basel II NPR.
\8\ The Agencies' existing capital rules, however, would continue to permit the use of internal ratings for a direct credit substitute (but not a purchased creditenhancing interestonly strip) assumed in connection with an assetbacked commercial paper program sponsored by a banking organization. 12 CFR part 3, appendix A section 4(g) (OCC); 12 CFR parts 208 and 225, appendix A, section III.B.3.F (Board); 12 CFR part 325, appendix A, section II.B.5(g)(1) (FDIC); and 12 CFR 567.6(b)(4) (OTS).
The Agencies also believe that any proposal to tie capital requirements under Basel IA to the capital charges that would result under the proposed Basel II rules is premature. The Agencies anticipate that the Basel II transition phase would not be completed until 2011 at the earliest. The Agencies also have other concerns about the commenter's proposal including the absence of a capital charge for operational risk; the method by which any premium over the Basel II charges would be determined; difficulties in defining comparable portfolios; and the need to periodically update capital requirements, which would significantly increase complexity and burden.
II. Proposed Changes
In considering revisions to the existing riskbased capital rules, the Agencies were guided by five broad principles. A revised framework must: (1) Promote safe and sound banking practices and a prudent level of regulatory capital; (2) maintain a balance between risk sensitivity and operational feasibility; (3) avoid undue regulatory burden; (4) create appropriate incentives for banking organizations; and (5) mitigate material distortions in the riskbased capital requirements for large and small banking organizations.
The Agencies are concerned about potential competitive
disadvantages that could result from capital requirements that differ
depending on the capital regime under which a banking organization
operates. By allowing nonBasel II banking organizations the choice of
adopting all of the provisions in this proposal or continuing to use
the existing riskbased capital rules, the proposed regulation is
intended to help maintain the competitive position of these banks
relative to Basel II banking organizations. Moreover, the proposed rule
strives for better alignment of capital and risk, with capital
requirements potentially higher for organizations with riskier
exposures and lower for those with safer exposures. The Agencies seek
to achieve these objectives while balancing operational feasibility and regulatory burden considerations.
In this NPR, the Agencies are proposing to:
The existing riskbased capital requirements focus primarily on
credit risk and do not impose explicit capital charges for interest
rate, operational, or other risks. These risks, however, are implicitly
covered by the existing riskbased capital rules. The riskbased
capital charges proposed in this NPR continue the implicit coverage of
risks other than credit risk. Moreover, the Agencies are not proposing
revisions to the existing leverage ratio requirement (that is, the ratio of Tier 1 capital to total assets).\9\
\9\ 12 CFR 3.6(b) and (c) (OCC); 12 CFR part 208, appendix B and 12 CFR part 225, appendix D (Board); 12 CFR part 325.3 (FDIC); and 12 CFR 567.8 (OTS).
To ensure safety and soundness, the Agencies intend to closely monitor the level of riskbased capital at those banking organizations that choose to opt in to Basel IA. Any significant decline in the aggregate level of riskbased capital for these banking organizations may warrant modifications to the proposed riskbased capital rules.
Question 1: The Agencies welcome comments on all aspects of these proposals, especially suggestions for reducing the burden that may be associated with these proposals. The Agencies believe that a banking organization that chooses to adopt these proposals will generally be able to do so with data it currently uses as part of its credit approval and portfolio management processes. Commenters are particularly requested to address whether any of the proposed changes would require data that are not currently available as part of the organization's existing credit approval and portfolio management systems.
A. OptIn Proposal
In the Basel IA ANPR, the Agencies recognized that certain banking organizations might not want to assume the additional burden that might accompany a more risksensitive approach and might prefer to continue to apply the existing riskbased capital rules. Additionally, many commenters, particularly community bank respondents, favored an approach that would allow wellcapitalized banking organizations to remain under the existing riskbased capital rules. For these commenters, limiting regulatory burden was a higher priority than increasing the risk sensitivity of their riskbased capital charges. One group of midsize banking organizations recommended applying the proposed rules only to banking organizations with assets of $500 million or greater. Some commenters noted the risk of ``cherry picking'' in permitting a choice between the framework discussed in the Basel IA ANPR and the existing riskbased capital rules, or adoption of parts of each.
The Agencies are proposing that a nonBasel II banking organization
may, if it chooses, adopt the revisions in this proposed rule. If a
banking organization chooses to use these proposed capital rules,
however, it would be required to implement them in their entirety. The
Agencies are proposing to permit a banking organization to adopt these
proposals by notifying its primary Federal supervisor. Before a banking
organization decides to opt in to these proposals, the Agencies expect
that the organization would review its ability to collect and utilize
the information required and evaluate the potential impact on its
regulatory capital. A banking organization that chooses to adopt these
proposals (that is, opts in) would also be able to request returning to
the existing capital rules by first notifying its primary Federal
supervisor. In its review of such a request, the primary Federal
supervisor would ensure that the riskbased capital requirements
appropriately reflect the risk profile of the banking organization and the change is not for purposes of
capital arbitrage. Further, the Agencies expect that a banking organization would not alternate between the existing and proposed riskbased capital rules. The Agencies would reserve the authority to require a banking organization to calculate its minimum riskbased capital requirements in accordance with this proposal or the existing riskbased capital rules.
Under this proposal, a nonBasel II banking organization could continue to calculate its riskbased capital requirements using the existing riskbased capital rules. In this case, the banking organization would not need to notify its primary Federal supervisor or take any other action. As noted, above, however, the Agencies would retain the authority to require a nonBasel II banking organization to use either the existing or the proposed riskbased capital rules if the banking organization's primary Federal supervisor determines that a particular capital rule is more appropriate for the risk profile of the banking organization.
Question 2: The Agencies seek comment on all aspects of the
proposal to allow banks to opt in to and out of the proposed rules.
Specifically, the Agencies seek comment on any operational challenges
presented by the proposed rules. How far in advance should a banking
organization be required to notify its primary Federal supervisor that
it intends to implement the proposed rule? If a banking organization
wishes to ``opt out'' of the proposed rule, what criteria should guide the review of a request to opt out? When should a banking
organization's election to opt in or opt out be effective? In addition, the Agencies seek comment on the appropriateness of requiring a banking organization to apply the proposed Basel IA capital rules based on a banking organization's asset size, level of complexity, risk profile, or scope of operations.
B. Increase the Number of Risk Weight Categories
The Agencies' existing riskbased capital rules contain five risk weight categories: Zero, 20, 50, 100, and 200 percent. Differentiation of credit quality among individual exposures is generally limited to these few riskweight categories. In the Basel IA ANPR, the Agencies suggested adding four new riskweight categories (35, 75, 150, and 350 percent) and invited comment on whether: (1) Increasing the number of riskweight categories would allow supervisors to more closely align capital requirements with risk; (2) the suggested additional risk weight categories would be appropriate; (3) the riskbased capital framework should include more riskweight categories than the four suggested; and (4) increasing the number of riskweight categories would impose unnecessary burden on banking organizations.
Commenters generally supported increasing the number of riskweight categories to enhance the overall risksensitivity of the riskbased capital rules. However, many commenters noted that adding too many categories could make the rules too complex. Several commenters argued that the 350 percent risk weight is too high and suggested that any new riskweight categories should be lower than 100 percent to reflect the lower risks associated with certain mortgages and other highquality assets. A few commenters suggested that the Agencies create a new 10 percent risk weight category to account for very lowrisk assets.
The Agencies agree with the commenters that increasing the number of riskweight categories would allow for greater risk sensitivity than the existing riskbased capital rules. Accordingly, the Agencies propose to add 35, 75, and 150 percent riskweight categories. The Agencies believe that adding a 150 percent risk weight category and expanding the use of the existing 200 percent risk weight category would allow for somewhat greater differentiation of credit risk among more risky exposures than is permitted by the existing capital rules. At the same time, for certain types of relatively lowrisk exposures, the existing riskbased capital charge may be higher than warranted. Therefore, the 35 and 75 percent risk weight categories provide an opportunity to increase the risk sensitivity of the regulatory capital charges for these exposures.
The Agencies agree that the credit risks covered by this NPR generally do not warrant a 350 percent category, and are not proposing to add this risk weight. Question 3: The Agencies seek comment on whether these or any other new risk weight categories would be appropriate. More specifically, the Agencies are interested in any comments regarding whether any categories of assets might warrant a risk weight higher than 200 percent and what risk weight might be appropriate for such assets. The Agencies also solicit comment on whether a 10 percent risk weight category would be appropriate and what exposures should be included in this risk weight category.
C. Use of External Credit Ratings to Risk Weight Exposures
The Agencies' existing riskbased capital rules permit the use of
external credit ratings issued by a nationally recognized statistical
rating organization (NRSRO) \10\ to assign risk weights to recourse
obligations, direct credit substitutes (DCS), residual interests (other
than a creditenhancing interestonly strip), and asset and mortgage
backed securities.\11\ For example, AAA and AArated mortgagebacked
securities \12\ are assigned to the 20 percent risk weight category
while BBrated mortgagebacked securities are assigned to the 200
percent risk weight category. When the Agencies revised the riskbased
capital rules to allow for the use of external credit ratings issued by
an NRSRO for the types of exposures listed above, the Agencies
acknowledged that such ratings could be used to determine the risk
based capital requirements for other types of debt instruments, such as rated corporate debt.
\10\ An NRSRO is an entity recognized by the Division of Market Regulation of the Securities and Exchange Commission (SEC) as a nationally recognized statistical rating organization for various purposes, including the SEC's uniform net capital requirements for brokers and dealers 17 CFR 240.15c31). On September 29, 2006, the President signed the Credit Rating Agency Reform Act of 2006 (Reform Act) (Pub. L. 109291) into law. The Reform Act requires a credit rating agency that wants to represent itself as an NRSRO to register with the SEC. The Agencies may review their riskbased capital rules, guidance and proposals from time to time in order to determine whether any modification of the Agencies' definition of an NRSRO is appropriate.
\11\ Some synthetic structures may also be subject to the external rating approach. For example, certain creditlinked notes issued from a synthetic securitization are risk weighted according to the rating given to the notes. 66 FR 59614, 59622 (November 29, 2001).
\12\ The ratings designations (for example, ``AAA,'' ``BBB,'' ``A1,'' and ``P1''), are illustrative and do not indicate any preference for, or endorsement of, any particular rating agency description system.
In the Basel IA ANPR, the Agencies suggested expanding the use of NRSRO ratings to determine the riskbased capital charge for most categories of NRSROrated exposures, including sovereign and corporate debt securities and rated loans. The Agencies indicated, however, that they were considering retaining the existing riskbased capital treatment for U.S. government and agency exposures, U.S. government sponsored entity exposures, and municipal obligations. Tables 1 and 2 in the Basel IA ANPR matched ratings and possible corresponding risk weights for long and shortterm exposures. The Agencies requested comment on the use of other methodologies to assign risk weights to unrated exposures.
Many commenters supported the use of external ratings in principle but noted that nonBasel II banking organizations' holdings of securities and loans generally are not rated. Thus, they suggested that the expansion of the use of NRSRO ratings would have little impact on these banking organizations. A few commenters also asserted that using NRSRO ratings might discourage lending to nonrated entities.
Many commenters argued that the risk weights suggested in the Basel IA ANPR were too high. In particular, many commenters said that the 350 percent and 200 percent risk weights for exposures rated BB+ and lower would be unnecessarily punitive. A few commenters also expressed concerns about NRSRO ratings generally. These commenters said that there are too few NRSROs to ensure adequate market discipline, NRSROs are inadequately supervised, and NRSRO ratings often react too slowly to crises.
A number of commenters suggested alternative methods for differentiating risk among commercial exposures and making the capital requirements for these exposures more risk sensitive. Many larger banking organizations suggested allowing an internal risk measurement approach to determine riskbased capital requirements. Some smaller banking organizations sought increased recognition of a variety of risk mitigation techniques, such as personal guarantees and collateral.
The Agencies acknowledge that expanding the use of external ratings may have little effect on the riskbased capital requirements for existing loan portfolios at most banking organizations. To the extent that assets in a banking organization's investment portfolio are rated, however, the Agencies believe that using external ratings will improve risk sensitivity of the capital charges for these assets. Furthermore, implementing broader use of external ratings would also provide a basis for expanding recognition of eligible guarantees and recognized collateral. Accordingly, the Agencies are proposing to expand the use of external ratings for purposes of determining the riskbased capital charge for certain externally rated exposures as described below in the sections on direct exposures, recognized collateral, and eligible guarantees.
An external rating would be defined as a credit rating that is assigned by an NRSRO, provided that the credit rating (1) fully reflects the entire amount of credit risk with regard to all payments owed to the holder and the credit risk associated with timely repayment of principal and interest; (2) is published in an accessible public form, for example, on the NRSRO's Web site and in financial media; (3) is monitored by the NRSRO; and (4) is, or will be, included in the issuing NRSRO's publicly available transition matrix.\13\ If an exposure has two or more external ratings, the banking organization must use the lowest assigned external rating to risk weight the exposure. If an exposure has components that are assigned different external ratings, a banking organization would be required to assign the lowest rating to the entire exposure. If a component is not externally rated, the entire exposure would be treated as unrated. \13\ A transition matrix tracks the performance and stability (or ratings migration) of an NRSRO's issued external ratings. i. Direct Exposures
The Agencies are proposing to use external ratings to risk weight
(1) sovereign \14\ debt and debt securities, and (2) debt securities
issued by and rated loans to nonsovereign entities including
securities firms, insurance companies, bank holding companies, savings
and loan holding companies, multilateral lending and regional
development institutions, partnerships, limited liability companies,
business trusts, special purpose entities, associations and other
similar organizations. External ratings for direct exposures to
sovereigns would be based on the external rating of the exposure or, if
the exposure is unrated, on the sovereign's issuer rating. Direct
exposures to nonsovereigns would be risk weighted based on the
external rating of the exposure. For example, a banking organization
would assign any AAArated debt security issued by a corporation,
insurance company, or securities firm to the 20 percent risk weight
category. The Agencies are, however, not proposing to permit the use of issuer ratings for nonsovereigns.
\14\ A sovereign is defined as a central government, including its agencies, departments, ministries, and the central bank. A soverign does not include state, provincial, or local governments, or commercial enterprises owned by a central government.
The risk weights for direct exposures are detailed in Table 1
(longterm exposures) and Table 2 (shortterm exposures) below. The
Agencies are also proposing to replace the existing riskweight tables
for externally rated recourse obligations, DCS, residual interests
(other than a creditenhancing interestonly strip), and asset and
mortgagebacked securities \15\ with the risk weights in Tables 1 and
2.\16\ This proposed treatment would apply to all externally rated
exposures unless the banking organization uses a market risk rule.\17\
For a banking organization that uses a market risk rule, this treatment
applies only to externally rated exposures held in the banking book.
\15\ 12 CFR part 3, appendix A, section 4, Tables B and C (OCC);
12 CFR parts 208 and 225, appendix A, section III.B.3.c.i. (Board);
12 CFR part 325, appendix A, section II.B.5.(d) (FDIC); and 12 CFR 567.6(b) (OTS) (the Recourse Rule).
\16\ With the exception of the clarification of the definition of an external rating and the proposed riskbased capital charge for securitizations with early amortization features described in section F of this NPR, the Agencies are not proposing to make other changes to the existing riskbased capital rules for recourse obligations, DCS, and residual interests. See 12 CFR part 3, appendix A, section 4 (OCC); 12 CFR parts 208 and 225, appendix A, section III.B.3 (Board); 12 CFR part 325, appendix A, section II.B.5 (FDIC); and 12 CFR 567.6(b) (OTS) (Recourse Rule).
\17\ See 12 CFR part 3, appendix B (OCC); 12 CFR parts 208 and 225, appendix E (Board); and 12 CFR part 325 appendix C (FDIC). The Agencies issued an NPR that proposes revisions to the Market Risk rules. OTS does not currently have a market risk rule, but has proposed to add a new rule on this topic in the Market Risk NPR. See 71 FR 55958 (September 25, 2006).
The Agencies intend to retain the existing riskbased capital
treatment for direct exposures to publicsector entities,\18\ the U.S.
government and its agencies, U.S. governmentsponsored agencies, and
depository institutions (U.S. and foreign) and for unrated loans made
to nonsovereign entities. Exposures issued by these entities are not subject to Table 1 or 2.
\18\ Publicsector entities include states, local authorities and governmental subdivisions below the central government level in an Organization for Economic Cooperation and Development (OECD) country. In the United States, this definition encompasses a state, county, city, town, or other municipal corporation, a public authority, and generally any publiclyowned entity that is an instrument of a state or municipal corporation. This definition does not include commercial companies owned by the public sector. The OECDbased group of countries comprises all full members of the OECD, as well as countries that have concluded special lending arrangements with the International Monetary Fund (IMF) associated with the Fund's General Arrangements to Borrow.
Table 1.Proposed Risk Weights Based on External Ratings for LongTerm Exposures Securitization Sovereign risk Nonsovereign exposure \1\ Longterm rating category Example weight (in risk weight risk weight percent) (in percent) (in percent) Highest investment grade rating........ AAA.................... 0 20 20 Secondhighest investment grade rating. AA..................... 20 20 20 Thirdhighest investment grade rating.. A...................... 20 35 35 Lowestinvestment grade ratingplus... BBB+................... 35 50 50 Lowestinvestment grade rating......... BBB.................... 50 75 75 Lowestinvestment grade ratingminus.. BBB................... 75 100 100 One category below investment grade.... BB+, BB................ 75 150 200 One category below investment grade BB.................... 100 200 200 minus.
Two or more categories below investment B, CCC................. 150 200 \1\ grade.
Unrated \2\............................ n/a.................... 200 200 \1\ \1\ A securitization exposure includes asset and mortgagebacked securities, recourse obligations, DCS, and residuals (other than a creditenhancing interestonly strip). For longterm securitization exposures that are externally rated more than one category below investment grade, shortterm exposures that are rated below investment grade, or any unrated securitization exposures, the existing riskbased capital treatment as described in the Agencies' Recourse Rule would be used.
\2\ Unrated sovereign exposures and unrated debt securities issued by nonsovereigns would receive the risk weight indicated in Tables 1 and 2. Other unrated exposures, for example, unrated loans to nonsovereigns, would continue to be risk weighted under the existing riskbased capital rules. Table 2.Proposed Risk Weights Based on External Ratings for ShortTerm Exposures Securitization Sovereign risk Nonsovereign exposure \1\ Shortterm rating category Example weight (in risk weight risk weight percent) (in percent) (in percent) Highest investment grade rating........ A1, P1............... 0 20 20 Secondhighest investment grade rating. A2, P2............... 20 35 3 Lowest investment grade................ A3, P3............... 50 75 75 Unrated \2\............................ n/a.................... 100 100 (\1\) \1\ A securitization exposure includes asset and mortgagebacked securities, recourse obligations, DCS, and residuals (other than a creditenhancing interestonly strip). For longterm securitization exposures that are externally rated more than one category below investment grade, shortterm exposures that are rated below investment grade, or any unrated securitization exposures, the existing riskbased capital treatment as described in the Agencies' Recourse Rule would be used.
\2\ Unrated sovereign exposures and unrated debt securities issued by nonsovereigns would receive the risk weight indicated in Tables 1 and 2. Other unrated exposures, for example, unrated loans to nonsovereigns, would continue to be risk weighted under the existing riskbased capital rules.
The proposed risk weights in Tables 1 and 2 are generally consistent with the historical default rates reported in the default studies published by NRSROs. The Agencies believe that the additional application of external ratings to the exposures specified above would improve the risk sensitivity of the capital treatment for those exposures. Furthermore, the Agencies believe that the revised risk weight tables for externally rated recourse obligations, DCS, residual interests (other than creditenhancing interest onlystrips), and asset and mortgagebacked securities would also better reflect risk than the Agencies' existing riskbased capital rules.
Under the proposal, the Agencies would retain their authority to reassign an exposure to a different risk weight on a casebycase basis to address the risk of a particular exposure.
ii. Recognized Financial Collateral
The Agencies' existing riskbased capital rules recognize limited
types of collateral: (1) Cash on deposit; (2) securities issued or
guaranteed by central governments of the OECD countries; (3) securities
issued or guaranteed by the U.S. government or its agencies; (4)
securities issued or guaranteed by U.S. governmentsponsored agencies;
and (5) securities issued by certain multilateral lending institutions
or regional development banks.\19\ In the past, the banking industry
has commented that the Agencies should recognize a wider array of
collateral types for purposes of reducing riskbased capital requirements.
\19\ The Agencies' rules for collateral transactions, however, differ somewhat as described in the Agencies' joint report to Congress. ``Joint Report: Differences in Accounting and Capital Standards among the Federal Banking Agences,'' 70 FR 15379 (March 25, 2005).
In the Basel IA ANPR, the Agencies noted that they were considering expanding the list of recognized collateral to include shortor long term debt securities (for example, corporate and asset and mortgage backed securities) that are externally rated at least investment grade by an NRSRO, or issued or guaranteed by a sovereign central government that is externally rated at least investment grade by an NRSRO. Consistent with the proposed treatment for direct exposures, the Basel IA ANPR suggested assigning exposures or portions of exposures collateralized by financial collateral to riskweight categories based on the external rating of that collateral. To use this expanded list of collateral, the Basel IA ANPR considered requiring a banking organization to have collateral management systems to track collateral and readily determine its realizable value. The Agencies sought comment on whether this approach for expanding the scope of recognized collateral would improve risk sensitivity without being overly burdensome.
Many commenters supported expanding the list of recognized
collateral, but several also noted that using NRSRO ratings would have
little effect on most community banks. Some commenters suggested reducing the risk weights applied to exposures secured by
any collateral that is legally perfected and has objective methods of valuation or can be readily markedtomarket. Many commenters also stated that any collateral valuation and monitoring requirements likely would be too costly to benefit smaller community banks.
To increase the risk sensitivity of the existing riskbased capital rules, the Agencies are proposing to revise the list of recognized collateral to include a broader array of externally rated, liquid, and readily marketable financial instruments. The revised list would incorporate long and shortterm debt securities and securitization exposures that are:
a. Issued or guaranteed by a sovereign where such securities are externally rated at least investment grade by an NRSRO; or an exposure issued or guaranteed by a sovereign with an issuer rating that is at least investment grade; or
b. Issued by nonsovereigns where such securities are externally rated at least investment grade by an NRSRO.
Consistent with the Agencies' existing riskbased capital rules, the Agencies propose to continue to recognize collateral that is either issued or guaranteed by certain sovereigns. For nonsovereign exposures, however, the Agencies propose that the collateral itself must be externally rated investment grade or better to qualify as recognized collateral. The Agencies believe that this more conservative approach for recognizing nonsovereign collateral is appropriate and expect that any guarantee provided by a nonsovereign would be reflected in the external rating of the collateral.
A banking organization would assign exposures collateralized by financial collateral externally rated at least investment grade to the appropriate risk weight in Table 1 or 2 above. If an exposure is partially collateralized, a banking organization could assign the portions of exposures collateralized by the market value of the externally rated collateral to the appropriate risk weight category in Tables 1 and 2 of this NPR. For example, the portion of an exposure collateralized by the market value of a AAArated corporate debt security would be assigned to the 20 percent risk weight category. The Agencies are proposing a minimum risk weight of 20 percent for collateralized exposures except as noted below.
The Agencies have decided to retain their respective riskbased capital rules that govern the following collateral: Cash, securities issued or guaranteed by the U.S. government or its agencies, and securities issued or guaranteed by U.S. governmentsponsored agencies. The Agencies are also retaining the existing riskbased capital rules for exposures collateralized by securities issued or guaranteed by other OECD central governments that meet certain criteria.\20\ \20\ 12 CFR part 3, appendix A, section 3(a)(1)(viii) (OCC); and 12 CFR parts 208 and 225, appendix A, section III.C.1 (Board). iii. Eligible Guarantors
Under the Agencies' existing riskbased capital rules, the recognition of third party guarantees is limited to guarantees provided by central governments of OECD countries, U.S. government and governmentsponsored entities, publicsector entities in OECD countries, multilateral lending institutions and regional development banks, depository institutions and qualifying securities firms in OECD countries, depository institutions in nonOECD countries (shortterm claims), and central governments of nonOECD countries (local currency exposures only).
In the Basel IA ANPR, the Agencies suggested expanding the scope of eligible guarantors to include any entity whose longterm senior debt has been assigned an external credit rating of at least investment grade by an NRSRO. The applicable risk weight for guaranteed exposures would be based on the risk weights corresponding to the rating of the longterm debt of the guarantor.
Most commenters supported, in principle, expanding the list of eligible guarantors. However, many commenters noted that very few community and midsize banking organizations have exposures that are guaranteed by externally rated entities. Thus, many commenters suggested that this provision would have little impact unless the proposed revisions recognized more types of guarantees.
The Agencies believe that the range of eligible thirdparty
guarantors under the existing riskbased capital rules is restrictive
and ignores market practice. As a result, the Agencies are proposing to
expand the list of eligible guarantors by recognizing entities that
have longterm senior debt (without credit enhancement) rated at least
investment grade by an NRSRO or, in the case of a sovereign, an issuer
rating that is at least investment grade. Under this NPR, a recognized thirdparty guarantee would have to:
(1) Be written and unconditional, and, for a sovereign guarantee, be backed by the full faith and credit of the sovereign;
(2) Cover all or a pro rata portion of contractual payments of the obligor on the reference exposure; \21\
\21\ If an exposure is partially guaranteed, the pro rata portion not covered by the guarantee would be assigned to the risk weight category appropriate to the obligor, after consideration of collateral and external ratings.
(3) Give the beneficiary a direct claim against the protection provider;
(4) Be noncancelable by the protection provider for reasons other than the breach of the contract by the beneficiary;
(5) Be legally enforceable against the protection provider in a jurisdiction where the protection provider has sufficient assets against which a judgment may be attached and enforced; and
(6) Require the protection provider to make payment to the beneficiary on the occurrence of a default (as defined in the guarantee) of the obligor on the reference exposure without first requiring the beneficiary to demand payment from the obligor.
To be considered an eligible guarantor, a sovereign or its senior longterm debt (without credit enhancement) must be externally rated at least investment grade. Nonsovereigns must have longterm senior debt (without credit enhancement) that is externally rated at least investment grade. Under this proposal, a banking organization could assign the portions of exposures guaranteed by eligible guarantors to the proposed risk weight category corresponding to the external rating of the eligible guarantors' longterm senior debt in accordance with Table 1 above.
The Agencies would retain the existing riskweight treatment of exposures guaranteed by the U.S. government and its agencies, U.S. governmentsponsored agencies, publicsector entities, depository institutions in OECD countries, and depository institutions in nonOECD countries (shortterm exposures only).
Question 4: The Agencies solicit comment on all aspects of the
proposed use of external ratings including the appropriateness of the
risk weights, expanded collateral, and additional eligible guarantors.
The Agencies also seek comment on whether to exclude certain externally
rated exposures from the ratings treatment as proposed or to use
external ratings as a measure for all externally rated exposures,
collateral, and guarantees. Alternatively, should the Agencies retain
the existing riskbased capital treatment for certain types of
exposures, for example, qualifying securities firms? The Agencies are
also interested in comments on all aspects of the scope of the terms sovereign, non
sovereign, and securitization exposures. Specifically, the Agencies seek comment on the scope of these terms, whether they should be expanded to cover other entities, or whether any entities included in these definitions should be excluded.
iv. GovernmentSponsored Agencies
One area of particular interest to the Agencies is the risk
weighting of exposures to U.S. governmentsponsored agencies, also
commonly referred to as governmentsponsored entities (GSEs). The
Agencies' existing riskbased capital regulations assign a 20 percent
risk weight to exposures issued or guaranteed by GSEs. The Basel IA NPR
proposes to retain this riskbased capital treatment. The Agencies are
aware that there are various types of ratings that might increase the
risk sensitivity of risk weights assigned to GSE exposures. For
example, NRSROs rate the creditworthiness of shortterm senior debt,
senior unsecured debt, subordinated debt and preferred stock of some
GSEs. These ratings on individual exposures, however, are often based
in part on the NRSROs' assessment of the extent to which the U.S.
government might come to the financial aid of a GSE if necessary. In
this context, and as indicated in the preamble to the Basel II NPR, the
Agencies do not believe that risk weight determinations should be based
on the possibility of U.S. government financial assistance, except for
the financial assistance the U.S. government has legally committed to
provide. The Agencies believe the existing approach has thus far met
this objective. However, the Agencies also note that as part of the
October 19, 2000 agreement with their regulator,\22\ both Fannie Mae
and Freddie Mac agreed to obtain and disclose annually ratings that
would ``assess the risk to the government, or the independent financial strength, of each of the companies.'' \23\
\22\ ``Freddie Mac and Fannie Mae Enhancements to Capital Strength, Disclosure and Market Discipline'', October 19, 2000 (agreement between the GSEs and the Office of Federal Housing Enterprise Oversight).
\23\ Ibid, p. 2.
In accordance with the agreement, Fannie Mae and Freddie Mac currently obtain and disclose separate ratings from two NRSROs ``Standard & Poor's (S&P) and Moody's Investors Service (Moody's). The S&P ``risk to the government rating'' uses the same scale as its standard corporate credit ratings. Currently, Fannie Mae and Freddie Mac both have a risk to the government issuer rating of AA from S&P, which is unchanged from the initial AA issuer rating that S&P initially provided in 2001. Moody's ``bank financial strength rating'' (BFSR) uses a scale of AE. In 2002, Moody's provided a BFSR of A to both GSEs. On March 28, 2005, Moody's downgraded Fannie Mae's BFSR to B+. Based on Moody's mapping of BFSRs to Moody's basic credit assessment ratings, A− is the equivalent of an Aa1 and B+ maps to an Aa2.
Both the risk to government rating and the BFSR (collectively, financial strength ratings) are issuer ratings that evaluate the financial strength of each GSE without respect to any implied financial assistance from the U.S. government. These financial strength ratings are published and monitored by the issuing NRSRO but they are not included in the NRSROs' transition matrices. These ratings are an indicator of each GSE's overall financial condition and safety and soundness and, thus, do not apply to any specific financial obligation or the probability of timely payment thereof.\24\ If the Agencies were to use these S&P and Moody's financial strength ratings to risk weight exposures to Fannie Mae and Freddie Mac in a manner similar to the use of external ratings for rated exposures as proposed in the Basel IA NPR, the current ratings would map to a 20 percent risk weight. \24\ Moody's and S&P's financial strength ratings would not meet the definition of an ``external rating'' as proposed in this NPR. Furthermore, the difficulty of defining an event of default and the lack of default data suggest that it would not be feasible to incorporate this type of rating into a transition matrix.
Question 5: The Agencies are considering whether to use financial strength ratings to determine risk weights for exposures to GSEs, where this type of rating is available, and are seeking comment on how a financial strength rating might be applied. For example, should the financial strength rating be mapped to the nonsovereign risk weights in Tables 1 and 2? Should these ratings apply to all GSE exposures including short and longterm debt, mortgagebacked securities, collateral, and guarantees? How should exposures to a GSE that lacks a financial strength rating be risk weighted? Are there any requirements in addition to publication and ongoing monitoring that should be incorporated into the definition of an acceptable financial strength rating?
Question 6: The Agencies also seek comment on whether to exclude certain other externally rated exposures from the ratings treatment as proposed or to use external ratings as a measure for additional externally rated exposures, collateral, and guarantees. Should the proposed ratings treatment be applicable for direct exposures to public sector entities or depository institutions? Likewise, should the proposed ratings treatment be applicable to exposures guaranteed by public sector entities or depository institutions, and to exposures collateralized by debt securities issued by those entities? D. Mortgage Loans Secured by a Lien on a OnetoFour Family Residential Property
i. First Lien Risk Weights
The Agencies' existing riskbased capital rules assign firstlien,
onetofour family residential mortgages to either the 50 percent or
100 percent risk weight category. Most mortgage loans secured by a
first lien on a onetofour family residential property (first lien
mortgages) meet the criteria to receive a 50 percent risk weight.\25\
The broad assignment of most first lien mortgages to the 50 percent
risk weight category has been criticized for not being sufficiently risk sensitive.
\25\ 12 CFR part 3 appendix A section 3(c)(iii) (OCC); 12 CFR parts 208 and 225 appendix A section III.C.3 (Board); 12 CFR part 325, appendix A, section II.C.3 (FDIC); and 12 CFR 567.1 (definition of ``qualifying mortgage loan'') and 12 CFR 567.6(a)(1)(iii)(B) (50 percent risk weight) (OTS).
In the Basel IA ANPR, the Agencies stated they were considering options to make the riskbased capital requirement for residential mortgages more risk sensitive while not unnecessarily increasing regulatory burden. One option was to base the capital requirement on loantovalue ratios (LTV), determined after consideration of private mortgage insurance (PMI). This option was illustrated by an LTV risk weight table that suggested risk weights of 20, 35, 50, and 100 percent.
Another option discussed in the Basel IA ANPR was to assign risk weights based on LTV in combination with an evaluation of borrower creditworthiness. Under this scenario, different ranges of LTV could be paired with specified credit assessments, such as credit scores. A first lien mortgage with a lower LTV made to a borrower with higher creditworthiness would receive a lower risk weight than a loan with higher LTV made to a borrower with lower creditworthiness.
The Agencies received many comments about how to risk weight first
lien mortgages. Many commenters cautioned against rules that would be
burdensome and costly to implement. Commenters generally supported the
use of LTV and stated that use of LTV in assigning risk weights would not be overly burdensome because LTV
information is collected when lenders originate mortgage loans.
Some commenters supported the use of a matrix based on LTV and a measure of creditworthiness, to further improve the risk sensitivity of the risk weights assigned to residential mortgage loans. They stated that this approach would address both collateral and borrower risk and would mirror current practices among mortgage lenders. Other commenters expressed concern about the potential burden of this approach, particularly for smaller banking organizations. Some commenters noted that certain credit assessment measures such as creditscoring models vary by region or credit reporting agency, and may harm lower income borrowers, borrowers without credit histories, and borrowers who have experienced unusual financial difficulties. Many of these commenters suggested that the use of credit scores as a measure of borrower creditworthiness be optional to alleviate the burden for some smaller banking organizations.
To increase the risk sensitivity of the existing riskbased capital
rules while minimizing the overall burden to banking organizations, the
Agencies are proposing to risk weight first lien mortgages based on
LTV. LTV is a meaningful indicator of potential loss and the likelihood
of borrower default. Consequently, under this proposal a banking
organization would assign a risk weight for a first lien mortgage,
including mortgages held for sale and mortgages held in portfolio as outlined in Table 3.
Table 3.Proposed LTV and Risk Weights for 14 Family First Liens Risk weight LoantoValue ratios (in percent) (in percent) 60 or less................................................. 20 Greater than 60 and less than or equal to 80............... 35 Greater than 80 and less than or equal to 85............... 50 Greater than 85 and less than or equal to 90............... 75 Greater than 90 and less than or equal to 95............... 100 Greater than 95............................................ 150
The Agencies believe the implementation of this proposed approach would not impose a significant burden on banking organizations because LTV information is readily available and is commonly used in the underwriting process.
The Agencies believe that the use of LTV would enhance the risk sensitivity of regulatory capital but it remains a fairly simple measurement of risk. Use of LTV in risk weighting first lien mortgages does not substitute for, or otherwise release a banking organization from, its obligation to have prudent loan underwriting and risk management practices that are consistent with the size, type, and risk of a mortgage product. Through the supervisory process, the Agencies would continue to ensure that banking organizations engage in prudent underwriting and risk management practices consistent with existing rules, supervisory guidance, and safety and soundness. The Agencies would continue to reserve the authority to require banking organizations to hold additional capital where appropriate.
In general, Table 3 would apply to first lien mortgages. The
Agencies would maintain their respective riskbased capital criteria
for a first lien mortgage (for example, prudent underwriting) to
receive a risk weight less than 100 percent.\26\ Table 3 would not
apply to loans to builders secured by certain presold properties,
which are subject to a statutory 50 percent risk weight.\27\ Other
loans to builders for the construction of residential property would
continue to be subject to a 100 percent risk weight. The Agencies would
maintain their respective capital treatment for a onetofour family
residential mortgage loan to a borrower for the construction of the
borrower's own home.\28\ Question 7: The Agencies seek comment on all
aspects of using LTV to determine the risk weights for first lien mortgages.
\26\ 12 CFR part 3 appendix A, section 3(3)(iii) (OCC); 12 CFR Parts 208 and 225, appendix A, section III.C.3 (Board); 12 CFR part 325, appendix A, section II.C.3 (FDIC); and 12 CFR 567.1 (definition of ``qualifying mortgage loan'') and 12 CFR 567.6(a)(1)(iii)(B) (50 percent risk weight) (OTS).
\27\ This statutory risk weight applies to loans to builders secured by onetofour family residential properties with
substantial project equity for the construction of onetofour family residences that have been presold under firm contracts to purchasers who have obtained firm commitments for permanent qualifying mortgage loans and have made substantial earnest money deposits. See Resolution Trust Corporation Refinancing,
Restructuring, and Improvement Act of 1991, Pub. L. 102233, Sec. 618(a), 105 Stat. 1761, 178991 (codified at 12 U.S.C. 1831n note (1991)).
\28\ 12 CFR part 3 appendix A, section 3(3)(iv) (OCC); 12 CFR parts 208 and 225, appendix A, section III.C.3. (Board); 12 CFR part 325, appendix A, section II.C.3 (FDIC); and 12 CFR 567.1 (definition of ``qualifying mortgage loan'') (OTS).
The Agencies' existing riskbased capital rules place certain privatelyissued mortgagebacked securities that do not carry the guarantee of a government or a governmentsponsored entity (for example, unrated senior positions) in the 50 percent risk weight category, provided the underlying mortgages would qualify for a 50 percent risk weight. The Agencies intend to continue to risk weight these privatelyissued mortgagebacked securities using the risk weights assigned to underlying mortgages under the Agencies' existing capital rules. Question 8: The Agencies seek comment on this treatment and other methods for riskweighting these privatelyissued mortgage backed securities, including the appropriateness of assigning risk weights to these securities based on the risk weights of the underlying mortgages as determined under Table 3.
While the Agencies are not proposing to use LTV and borrower
creditworthiness to risk weight mortgages, the Agencies continue to
evaluate approaches that would consider borrower creditworthiness in
risk weighting first lien mortgages. One such approach could use LTV
and a measure of borrower creditworthiness to assign risk weights in a
manner similar to that shown in Table 3A below. Table 3A would assign a
lower risk weight to mortgages with a lower LTV that are underwritten
to borrowers with a stronger credit history and a higher risk weight to
mortgages with a higher LTV that are underwritten to borrowers with a weaker credit history.
Table 3A.Illustrative RiskWeight Ranges for LTV and Credit History for 14 Family [First liens] First lien mortgages Illustrative risk weight ranges Credit history Credit history Credit history LoantoValue ratios (in percent) group 1 (in group 2 (in group 3 (in percent) percent) percent) 60 or less...................................................... 2035 2035 2035 Greater than 60 and less than or equal to 80.................... 2035 2035 3575 Greater than 80 and less than or equal to 90.................... 2050 3575 75150 Greater than 90 and less than or equal to 95.................... 2050 50100 100200 Greater than 95................................................. 3575 50100 150200
Table 3A presents three broad categories of relative credit performance (credit history groups). The Agencies would determine the credit history groups using default odds.
FOR FURTHER INFORMATION CONTACT
OCC: Nancy Hunt, Risk Expert, (202) 8744923; or Kristin Bogue, Risk Expert, (202) 8745411, Capital Policy Division; Ron Shimabukuro, Special Counsel, or Carl Kaminski, Attorney, Legislative and Regulatory Activities Division, (202) 8745090; 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; Barbara Bouchard, Deputy Associate Director, (202) 4523072; William Tiernay, Supervisory Financial Analyst (202) 8727579; or Juan C. Climent, Supervisory Financial Analyst, (202) 8727526, Division of Banking Supervision and Regulation; or Mark E. Van Der Weide, Senior Counsel, (202) 4522263, Legal Division. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 2634869.