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| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
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Washington, DC 20219

January 17, 2006 **Interpretive Letter #1049**

**January 2006**

#### 12 CFR 3

Dear **\[ \]**:

This letter responds to your e-mails of April 26 and September 15, 2005
requesting confirmation of your interpretation of the appropriate
capital treatment for a commitment to make a commercial or trade letter
of credit. You characterize the arrangement as a multipurpose loan
commitment in which the borrower has the option to use the commitment in
one of several ways, including a trade letter of credit. For this type
of arrangement, you believe that the credit conversion factor (CCF) for
the unused portion of the multipurpose commitment allocated exclusively
to a trade letter of credit should be zero percent under a short-term
commitment and 20 percent under a commitment greater than one year.
Based on the facts presented, the OCC has determined that the regulatory
risk-based capital treatment you describe for the trade letter of credit
portion of a multipurpose loan commitment is consistent with current OCC
regulations.

**Background**

Multipurpose loan commitments are commitments under which credit can be
extended to a borrower in several forms at the option of the borrower.
The borrower may use the commitment, in full, in any of the various
options, unless the commitment specifies sub limits for the available
forms of credit. In the situation you describe, a portion of the
multipurpose loan commitment may be drawn only as a trade letter of
credit, a trade-related contingency that is short-term,
self-liquidating, and collateralized by goods.

**Discussion**

To determine the risk-based capital charge for an off-balance sheet
exposure, the OCC's capital rules require a two-step process.[^1] First,
to determine an on-balance sheet equivalent amount, the amount of the
off-balance sheet exposure is multiplied by the applicable CCF. Then the
resulting on-balance sheet amount is assigned a risk weight based on the
relevant obligor, guarantor, and/or collateral.

The capital rules assign a zero percent CCF to unused commitments if the
original maturity of the commitment is one year or less and a 50 percent
CCF if the original maturity is greater than one year.[^2] When a trade
letter of credit is issued, the resulting exposure is also an
off-balance sheet exposure. The capital rules assign a CCF of 20 percent
to this type of exposure.[^3]

The OCC's capital rules, however, do not explicitly state how a
commitment to make a trade letter of credit should be treated for
risk-based capital purposes. You believe that the appropriate CCF for
the portion of a multipurpose loan commitment that may be drawn only as
a trade letter of credit should be zero for a short-term commitment and
20 percent for a commitment over one year, i.e., a commitment to make a
trade letter of credit would receive the lower of the CCFs applicable to
an issued trade letter of credit or a commitment to make a trade letter
of credit. Because a trade letter of credit is a short-term exposure
that self-liquidating, a trade letter of credit is generally considered
to be a relatively low-risk transaction. Accordingly, a short-term
commitment to make a trade letter of credit should not have a higher CCF
than a short-term commitment to make a loan. Similarly, a commitment
with a maturity greater than one year to make a trade letter of credit
should not incur a higher CCF than the CCF for an issued trade letter of
credit.

**Conclusion**

Based on your description of the multipurpose loan commitment with an
option to draw a part of the commitment only as a trade letter of
credit, the OCC has determined that the appropriate CCF for risk-based
capital purposes would be the lower of the CCFs applicable to a loan
commitment with the same original maturity or to the issued trade letter
of credit. Furthermore, in the case in which the sub limits for the
types of credit available under the multipurpose commitment overlap and
the types of credit have different CCFs, the highest CCFs are applied to
the maximum draws for risk-based capital purposes. Should you have
additional questions, please contact Nancy Hunt, risk expert, Capital
Policy Division at (202) 874-5070.

Sincerely,

/s/ Tommy Snow

Tommy Snow

Director, Capital Policy

[^1]: 12 CFR 3, appendix A, 3(b).

[^2]: 12 CFR 3, appendix A, 3(b)(2)(ii) and (4)(i).

[^3]: 12 CFR 3, appendix A, 3(b)(3)(i).