**TO:** Chief Executive Officers of National Banks, Department and
Division Heads, Examining Personnel, and Other Interested Parties

# PURPOSE

This bulletin transmits a proposed rule on residual interests published
in the *Federal Register* on September 27, 2000. Comments on the
proposed rule are due December 27, 2000.

**SUMMARY**

The proposed rule would alter the risk-based capital treatment of
certain residual interests in asset securitizations or other transfers
of financial assets. The proposed rule is intended to better align
regulatory capital requirements with the risk exposure of residual
interests, to encourage conservative valuation methods, and to restrict
excessive concentrations in these assets.

*[Background]{.underline}*

The proposal is intended to address concerns previously raised in the
December 1999 *Interagency Guidance on Asset Securitization*. This
guidance expressed concern that some institutions were not holding
adequate capital against residual interests, were not valuing these
assets properly, and were holding excessive amounts of these assets in
relation to capital. That document also indicated that regulatory
restrictions were actively being considered that would limit or
eliminate the amount of certain residual interests permitted in
regulatory capital.

Generally, residual interests are non-investment grade or unrated assets
retained by an issuing institution in order to provide credit support
for more senior positions in a securitization or other financial asset
transfer. Many residual interests are exposed to significant credit and
interest rate risk that make their valuation extremely sensitive to
changes in underlying credit and prepayment assumptions. These residual
interests also generally lack an active market through which a readily
available market price can be obtained. As a result, such residual
interests raise valuation and liquidity concerns, and large
concentrations of such illiquid and volatile assets in relation to
capital can threaten the safety and soundness of a banking organization.

*[Scope]{.underline}*

Residual interests subject to the proposed rule are defined as
on-balance-sheet assets that are retained by a seller in an asset
transfer and that are structured to absorb more than a pro-rata share of
credit loss through subordination provisions or other credit enhancement
techniques. Residual interests purchased from a third party are not
subject to the proposed rule. Residual interests, as defined, include
interest-only strips receivable, spread accounts, cash collateral
accounts, retained subordinated interests, and other similar forms of
on-balance-sheet assets that function as credit enhancements.

*[Proposed Capital Treatment]{.underline}*

The proposed treatment would amend the leverage and risk-based capital
requirements in the following manner:

-   Require that \"dollar-for-dollar\" capital be held against the
    amount of residual interests that are retained on balance sheet by
    an institution resulting from securitization activities, even if
    this amount exceeds the full capital charge typically held against
    the assets transferred; and,

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-   Restrict undue concentrations in residual interests by including
    them within a 25 percent of Tier 1 capital sublimit already
    established for non-mortgage servicing assets and purchased credit
    card relationships for regulatory capital purposes. Any amounts
    above this limit would be deducted from Tier 1 capital.

##### *Comments on the Proposal*

The OCC encourages all interested parties to review and comment on the
attached proposal. Please forward all comments to Communication
Division, 250 E Street SW, Washington, DC 20219, Attention Docket No.
00-17.

**FOR FURTHER INFORMATION CONTACT:**

Amrit Sekhon, risk specialist, Capital Policy, at 202/874-5211; or Ron
Shimabukuro, senior attorney, or Laura Goldman, senior attorney,
Legislative and Regulatory Activities Division, at 202/874-5090.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Jonathan L. Fiechter

Senior Deputy Comptroller

International and Economic Affairs

Attachment **\--** 65 FR 57993