Source: http://www.law.cornell.edu/cfr/text/12/part-225/appendix-G
Timestamp: 2013-12-10 08:21:58
Document Index: 533879444

Matched Legal Cases: ['art 225', 'art 225', 'art 225', 'art 225', 'art 225', 'art 225', 'art 3', 'art 208', 'art 325', 'art 567', 'art 225', '§ 211', 'art 231', '§ 211', 'art 225', 'art 34', 'art 208', 'art 365']

12 CFR Part 225, Appendix G to Part 225 - Capital Adequacy Guidelines for Bank Holding Companies: Internal-Ratings-Based and Advanced Measurement Approaches | Title 12 - Banks and Banking | Code of Federal Regulations | LII / Legal Information Institute
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12 CFR Part 225, Appendix G to Part 225 - Capital Adequacy Guidelines for Bank Holding Companies: Internal-Ratings-Based and Advanced Measurement Approaches
Pt. 225, App. G
Appendix G to Part 225—Capital Adequacy Guidelines for Bank Holding Companies: Internal-Ratings-Based and Advanced Measurement Approaches
Section 1Purpose, Applicability, Reservation of Authority, and Principle of Conservatism
Section 3Minimum Risk-Based Capital Requirements
Part IIQualifying Capital
Section 11Additional Deductions
Section 12Deductions and Limitations Not Required
Section 13Eligible Credit Reserves
Part IIIQualification
Section 21Qualification Process
Section 22Qualification Requirements
Section 23Ongoing Qualification
Section 24Merger and Acquisition Transitional Arrangements
Part IVRisk-Weighted Assets for General Credit Risk
Section 31Mechanics for Calculating Total Wholesale and Retail Risk-Weighted Assets
Section 32Counterparty Credit Risk of Repo-Style Transactions, Eligible Margin Loans, and OTC Derivative Contracts
Section 33Guarantees and Credit Derivatives: PD Substitution and LGD Adjustment Approaches
Section 34Guarantees and Credit Derivatives: Double Default Treatment
Section 35Risk-Based Capital Requirement for Unsettled Transactions
Part VRisk-Weighted Assets for Securitization Exposures
Section 41Operational Criteria for Recognizing the Transfer of Risk
Section 42Risk-Based Capital Requirement for Securitization Exposures
Section 43Ratings-Based Approach (RBA)
Section 44Internal Assessment Approach (IAA)
Section 45Supervisory Formula Approach (SFA)
Section 46Recognition of Credit Risk Mitigants for Securitization Exposures
Section 47Risk-Based Capital Requirement for Early Amortization Provisions
Part VIRisk-Weighted Assets for Equity Exposures
Section 51Introduction and Exposure Measurement
Section 52Simple Risk Weight Approach (SRWA)
Section 53Internal Models Approach (IMA)
Section 54Equity Exposures to Investment Funds
Section 55Equity Derivative Contracts
Part VIIRisk-Weighted Assets for Operational Risk
Section 61Qualification Requirements for Incorporation of Operational Risk Mitigants
Section 62Mechanics of Risk-Weighted Asset Calculation
Part VIIIDisclosure
Section 71Disclosure Requirements
Section 1. Purpose, Applicability, Reservation of Authority, and Principle of Conservatism
(a) Purpose. This appendix establishes:
(1) Minimum qualifying criteria for bank holding company using bank holding company-specific internal risk measurement and management processes for calculating risk-based capital requirements;
(2) Methodologies for such bank holding company to calculate their risk-based capital requirements; and
(3) Public disclosure requirements for such bank holding company.
(b) Applicability. (1) This appendix applies to a bank holding company that:
(i) Has consolidated total assets, as reported on the most recent year-end Consolidated Report of Condition and Income (Call Report) or Thrift Financial Report (TFR), equal to $250 billion or more;
(ii) Has consolidated total on-balance sheet foreign exposure at the most recent year-end equal to $10 billion or more (where total on-balance sheet foreign exposure equals total cross-border claims less claims with head office or guarantor located in another country plus redistributed guaranteed amounts to the country of head office or guarantor plus local country claims on local residents plus revaluation gains on foreign exchange and derivative products, calculated in accordance with the Federal Financial Institutions Examination Council (FFIEC) 009 Country Exposure Report);
(iii) Is a subsidiary of a depository institution that uses 12 CFR part 3, appendix C, 12 CFR part 208, appendix F, 12 CFR part 325, appendix D, or 12 CFR part 567, appendix C, to calculate its risk-based capital requirements; or
(iv) Is a subsidiary of a bank holding company that uses 12 CFR part 225, appendix G, to calculate its risk-based capital requirements.
(2) Any bank holding company may elect to use this appendix to calculate its risk-based capital requirements.
(3) A bank holding company that is subject to this appendix must use this appendix unless the Federal Reserve determines in writing that application of this appendix is not appropriate in light of the bank holding company's asset size, level of complexity, risk profile, or scope of operations. In making a determination under this paragraph, the Federal Reserve will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 263.202.
(c) Reservation of authority—(1) Additional capital in the aggregate. The Federal Reserve may require a bank holding company to hold an amount of capital greater than otherwise required under this appendix if the Federal Reserve determines that the bank holding company's risk-based capital requirement under this appendix is not commensurate with the bank holding company's credit, market, operational, or other risks. In making a determination under this paragraph, the Federal Reserve will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 263.202.
(2) Specific risk-weighted asset amounts. (i) If the Federal Reserve determines that the risk-weighted asset amount calculated under this appendix by the bank holding company for one or more exposures is not commensurate with the risks associated with those exposures, the Federal Reserve may require the bank holding company to assign a different risk-weighted asset amount to the exposures, to assign different risk parameters to the exposures (if the exposures are wholesale or retail exposures), or to use different model assumptions for the exposures (if relevant), all as specified by the Federal Reserve.
(ii) If the Federal Reserve determines that the risk-weighted asset amount for operational risk produced by the bank holding company under this appendix is not commensurate with the operational risks of the bank holding company, the Federal Reserve may require the bank holding company to assign a different risk-weighted asset amount for operational risk, to change elements of its operational risk analytical framework, including distributional and dependence assumptions, or to make other changes to the bank holding company's operational risk management processes, data and assessment systems, or quantification systems, all as specified by the Federal Reserve.
(3) Regulatory capital treatment of unconsolidated entities. The Federal Reserve may determine that the regulatory capital treatment for a bank holding company's exposure or other relationship to an entity not consolidated on the bank holding company's balance sheet is not commensurate with the actual risk relationship of the bank holding company to the entity. In making this determination, the Federal Reserve may require the bank holding company to treat the entity as if it were consolidated onto the balance sheet of the bank holding company for risk-based capital purposes and calculate the appropriate risk-based capital ratios accordingly, all as specified by the Federal Reserve.
(4) Other supervisory authority. Nothing in this appendix limits the authority of the Federal Reserve under any other provision of law or regulation to take supervisory or enforcement action, including action to address unsafe or unsound practices or conditions, deficient capital levels, or violations of law.
(d) Principle of conservatism. Notwithstanding the requirements of this appendix, a bank holding company may choose not to apply a provision of this appendix to one or more exposures, provided that:
(1) The bank holding company can demonstrate on an ongoing basis to the satisfaction of the Federal Reserve that not applying the provision would, in all circumstances, unambiguously generate a risk-based capital requirement for each such exposure greater than that which would otherwise be required under this appendix;
(2) The bank holding company appropriately manages the risk of each such exposure;
(3) The bank holding company notifies the Federal Reserve in writing prior to applying this principle to each such exposure; and
(4) The exposures to which the bank holding company applies this principle are not, in the aggregate, material to the bank holding company.
Advanced internal ratings-based (IRB) systems means a bank holding company's internal risk rating and segmentation system; risk parameter quantification system; data management and maintenance system; and control, oversight, and validation system for credit risk of wholesale and retail exposures.
Advanced systems means a bank holding company's advanced IRB systems, operational risk management processes, operational risk data and assessment systems, operational risk quantification systems, and, to the extent the bank holding company uses the following systems, the internal models methodology, double default excessive correlation detection process, IMA for equity exposures, and IAA for securitization exposures to ABCP programs.
Applicable external rating means:
(1) With respect to an exposure that has multiple external ratings assigned by NRSROs, the lowest solicited external rating assigned to the exposure by any NRSRO; and
(2) With respect to an exposure that has a single external rating assigned by an NRSRO, the external rating assigned to the exposure by the NRSRO.
Applicable inferred rating means:
(1) With respect to an exposure that has multiple inferred ratings, the lowest inferred rating based on a solicited external rating; and
(2) With respect to an exposure that has a single inferred rating, the inferred rating.
Asset-backed commercial paper (ABCP) program means a program that primarily issues commercial paper that:
(1) Has an external rating; and
(2) Is backed by underlying exposures held in a bankruptcy-remote SPE.
Asset-backed commercial paper (ABCP) program sponsor means a bank holding company that:
Backtesting means the comparison of a bank holding company's internal estimates with actual outcomes during a sample period not used in model development. In this context, backtesting is one form of out-of-sample testing.
Bank holding company is defined in section 2 of the Bank Holding Company Act (12 U.S.C. 1841).
Benchmarking means the comparison of a bank holding company's internal estimates with relevant internal and external data or with estimates based on other estimation techniques.
Business environment and internal control factors means the indicators of a bank holding company's operational risk profile that reflect a current and forward-looking assessment of the bank holding company's underlying business risk factors and internal control environment.
Carrying value means, with respect to an asset, the value of the asset on the balance sheet of the bank holding company, determined in accordance with GAAP.
Clean-up call means a contractual provision that permits an originating bank holding company or servicer to call securitization exposures before their stated maturity or call date. See also eligible clean-up call.
Control. A person or company controls a company if it:
Controlled early amortization provision means an early amortization provision that meets all the following conditions:
(1) The originating bank holding company has appropriate policies and procedures to ensure that it has sufficient capital and liquidity available in the event of an early amortization;
(2) Throughout the duration of the securitization (including the early amortization period), there is the same pro rata sharing of interest, principal, expenses, losses, fees, recoveries, and other cash flows from the underlying exposures based on the originating bank holding company's and the investors' relative shares of the underlying exposures outstanding measured on a consistent monthly basis;
(3) The amortization period is sufficient for at least 90 percent of the total underlying exposures outstanding at the beginning of the early amortization period to be repaid or recognized as in default; and
(4) The schedule for repayment of investor principal is not more rapid than would be allowed by straight-line amortization over an 18-month period.
Credit derivative means a financial contract executed under standard industry credit derivative documentation that allows one party (the protection purchaser) to transfer the credit risk of one or more exposures (reference exposure) to another party (the protection provider). See also eligible credit derivative.
(2) Exposes the holder to credit risk directly or indirectly associated with the underlying exposures that exceeds a pro rata share of the holder's claim on the underlying exposures, whether through subordination provisions or other credit-enhancement techniques.
Credit-enhancing representations and warranties means representations and warranties that are made or assumed in connection with a transfer of underlying exposures (including loan servicing assets) and that obligate a bank holding company to protect another party from losses arising from the credit risk of the underlying exposures. Credit-enhancing representations and warranties include provisions to protect a party from losses resulting from the default or nonperformance of the obligors of the underlying exposures or from an insufficiency in the value of the collateral backing the underlying exposures. Credit-enhancing representations and warranties do not include:
(1) Early default clauses and similar warranties that permit the return of, or premium refund clauses that cover, first-lien residential mortgage exposures for a period not to exceed 120 days from the date of transfer, provided that the date of transfer is within one year of origination of the residential mortgage exposure;
(2) Premium refund clauses that cover underlying exposures guaranteed, in whole or in part, by the U.S. government, a U.S. government agency, or a U.S. government sponsored enterprise, provided that the clauses are for a period not to exceed 120 days from the date of transfer; or
(1) Total wholesale and retail risk-weighted assets;
(2) Risk-weighted assets for securitization exposures; and
(3) Risk-weighted assets for equity exposures.
Current exposure means, with respect to a netting set, the larger of zero or the market value of a transaction or portfolio of transactions within the netting set that would be lost upon default of the counterparty, assuming no recovery on the value of the transactions. Current exposure is also called replacement cost.
Default—(1) Retail. (i) A retail exposure of a bank holding company is in default if:
(A) The exposure is 180 days past due, in the case of a residential mortgage exposure or revolving exposure;
(B) The exposure is 120 days past due, in the case of all other retail exposures; or
(C) The bank holding company has taken a full or partial charge-off, write-down of principal, or material negative fair value adjustment of principal on the exposure for credit-related reasons.
(ii) Notwithstanding paragraph (1)(i) of this definition, for a retail exposure held by a non-U.S. subsidiary of the bank holding company that is subject to an internal ratings-based approach to capital adequacy consistent with the Basel Committee on Banking Supervision's “International Convergence of Capital Measurement and Capital Standards: A Revised Framework” in a non-U.S. jurisdiction, the bank holding company may elect to use the definition of default that is used in that jurisdiction, provided that the bank holding company has obtained prior approval from the Federal Reserve to use the definition of default in that jurisdiction.
(iii) A retail exposure in default remains in default until the bank holding company has reasonable assurance of repayment and performance for all contractual principal and interest payments on the exposure.
(2) Wholesale. (i) A bank holding company's wholesale obligor is in default if:
(A) The bank holding company determines that the obligor is unlikely to pay its credit obligations to the bank holding company in full, without recourse by the bank holding company to actions such as realizing collateral (if held); or
(B) The obligor is past due more than 90 days on any material credit obligation(s) to the bank holding company. 1
1 Overdrafts are past due once the obligor has breached an advised limit or been advised of a limit smaller than the current outstanding balance.
(ii) An obligor in default remains in default until the bank holding company has reasonable assurance of repayment and performance for all contractual principal and interest payments on all exposures of the bank holding company to the obligor (other than exposures that have been fully written-down or charged-off).
Dependence means a measure of the association among operational losses across and within units of measure.
Derivative contract means a financial contract whose value is derived from the values of one or more underlying assets, reference rates, or indices of asset values or reference rates. Derivative contracts include interest rate derivative contracts, exchange rate derivative contracts, equity derivative contracts, commodity derivative contracts, credit derivatives, and any other instrument that poses similar counterparty credit risks. Derivative contracts also include unsettled securities, commodities, and foreign exchange transactions with a contractual settlement or delivery lag that is longer than the lesser of the market standard for the particular instrument or five business days.
(1) Is triggered solely by events not directly related to the performance of the underlying exposures or the originating bank holding company (such as material changes in tax laws or regulations); or
(2) Leaves investors fully exposed to future draws by obligors on the underlying exposures even after the provision is triggered.
Economic downturn conditions means, with respect to an exposure held by the bank holding company, those conditions in which the aggregate default rates for that exposure's wholesale or retail exposure subcategory (or subdivision of such subcategory selected by the bank holding company) in the exposure's national jurisdiction (or subdivision of such jurisdiction selected by the bank holding company) are significantly higher than average.
Effective maturity (M) of a wholesale exposure means:
(1) For wholesale exposures other than repo-style transactions, eligible margin loans, and OTC derivative contracts described in paragraph (2) or (3) of this definition:
(i) The weighted-average remaining maturity (measured in years, whole or fractional) of the expected contractual cash flows from the exposure, using the undiscounted amounts of the cash flows as weights; or
(ii) The nominal remaining maturity (measured in years, whole or fractional) of the exposure.
(2) For repo-style transactions, eligible margin loans, and OTC derivative contracts subject to a qualifying master netting agreement for which the bank holding company does not apply the internal models approach in paragraph (d) of section 32 of this appendix, the weighted-average remaining maturity (measured in years, whole or fractional) of the individual transactions subject to the qualifying master netting agreement, with the weight of each individual transaction set equal to the notional amount of the transaction.
(3) For repo-style transactions, eligible margin loans, and OTC derivative contracts for which the bank holding company applies the internal models approach in paragraph (d) of section 32 of this appendix, the value determined in paragraph (d)(4) of section 32 of this appendix.
Effective notional amount means, for an eligible guarantee or eligible credit derivative, the lesser of the contractual notional amount of the credit risk mitigant and the EAD of the hedged exposure, multiplied by the percentage coverage of the credit risk mitigant. For example, the effective notional amount of an eligible guarantee that covers, on a pro rata basis, 40 percent of any losses on a $100 bond would be $40.
(1) Is exercisable solely at the discretion of the originating bank holding company or servicer;
(3) (i) For a traditional securitization, is only exercisable when 10 percent or less of the principal amount of the underlying exposures or securitization exposures (determined as of the inception of the securitization) is outstanding; or
Eligible credit derivative means a credit derivative in the form of a credit default swap, nth-to-default swap, total return swap, or any other form of credit derivative approved by the Federal Reserve, provided that:
(6) If the contract requires the protection purchaser to transfer an exposure to the protection provider at settlement, the terms of at least one of the exposures that is permitted to be transferred under the contract provides that any required consent to transfer may not be unreasonably withheld;
(8) If the credit derivative is a total return swap and the bank holding company records net payments received on the swap as net income, the bank holding company records offsetting deterioration in the value of the hedged exposure (either through reductions in fair value or by an addition to reserves).
Eligible credit reserves means all general allowances that have been established through a charge against earnings to absorb credit losses associated with on- or off-balance sheet wholesale and retail exposures, including the allowance for loan and lease losses (ALLL) associated with such exposures but excluding allocated transfer risk reserves established pursuant to 12 U.S.C. 3904 and other specific reserves created against recognized losses.
Eligible double default guarantor, with respect to a guarantee or credit derivative obtained by a bank holding company, means:
(1) U.S.-based entities. A depository institution, a bank holding company, a savings and loan holding company (as defined in 12 U.S.C. 1467a) provided all or substantially all of the holding company's activities are permissible for a financial holding company under 12 U.S.C. 1843(k), a securities broker or dealer registered with the SEC under the Securities Exchange Act of 1934 (15 U.S.C. 78o
et seq.), or an insurance company in the business of providing credit protection (such as a monoline bond insurer or re-insurer) that is subject to supervision by a State insurance regulator, if:
(i) At the time the guarantor issued the guarantee or credit derivative or at any time thereafter, the bank holding company assigned a PD to the guarantor's rating grade that was equal to or lower than the PD associated with a long-term external rating in the third-highest investment-grade rating category; and
(ii) The bank holding company currently assigns a PD to the guarantor's rating grade that is equal to or lower than the PD associated with a long-term external rating in the lowest investment-grade rating category; or
(2) Non-U.S.-based entities. A foreign bank (as defined in § 211.2 of the Federal Reserve Board's Regulation K (12 CFR 211.2)), a non-U.S.-based securities firm, or a non-U.S.-based insurance company in the business of providing credit protection, if:
(i) The bank holding company demonstrates that the guarantor is subject to consolidated supervision and regulation comparable to that imposed on U.S. depository institutions, securities broker-dealers, or insurance companies (as the case may be), or has issued and outstanding an unsecured long-term debt security without credit enhancement that has a long-term applicable external rating of at least investment grade;
(ii) At the time the guarantor issued the guarantee or credit derivative or at any time thereafter, the bank holding company assigned a PD to the guarantor's rating grade that was equal to or lower than the PD associated with a long-term external rating in the third-highest investment-grade rating category; and
(iii) The bank holding company currently assigns a PD to the guarantor's rating grade that is equal to or lower than the PD associated with a long-term external rating in the lowest investment-grade rating category.
(1) Is written and unconditional;
(2) Covers all or a pro rata portion of all contractual payments of the obligor on the reference exposure;
(3) Gives the beneficiary a direct claim against the protection provider;
(4) Is not unilaterally cancelable by the protection provider for reasons other than the breach of the contract by the beneficiary;
(5) Is 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;
(6) Requires 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 in a timely manner without the beneficiary first having to take legal actions to pursue the obligor for payment;
(7) Does not increase the beneficiary's cost of credit protection on the guarantee in response to deterioration in the credit quality of the reference exposure; and
(8) Is not provided by an affiliate of the bank holding company, unless the affiliate is an insured depository institution, bank, securities broker or dealer, or insurance company that:
(i) Does not control the bank holding company; and
Eligible margin loan means an extension of credit where:
(1) The extension of credit is collateralized exclusively by liquid and readily marketable debt or equity securities, gold, or conforming residential mortgages;
(2) The collateral is marked to market daily, and the transaction is subject to daily margin maintenance requirements;
(3) The extension of credit is conducted under an agreement that provides the bank holding company the right to accelerate and terminate the extension of credit and to liquidate or set off collateral promptly upon an event of default (including upon an event of bankruptcy, insolvency, or similar proceeding) of the counterparty, provided that, in any such case, any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions; 2 and
2 This requirement is met where all transactions under the agreement are (i) executed under U.S. law and (ii) constitute “securities contracts” under section 555 of the Bankruptcy Code (11 U.S.C. 555), qualified financial contracts under section 11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or netting contracts between or among financial institutions under sections 401-407 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407) or the Federal Reserve Board's Regulation EE (12 CFR part 231).
(4) The bank holding company has conducted sufficient legal review to conclude with a well-founded basis (and maintains sufficient written documentation of that legal review) that the agreement meets the requirements of paragraph (3) of this definition and is legal, valid, binding, and enforceable under applicable law in the relevant jurisdictions.
Eligible operational risk offsets means amounts, not to exceed expected operational loss, that:
(1) Are generated by internal business practices to absorb highly predictable and reasonably stable operational losses, including reserves calculated consistent with GAAP; and
(2) Are available to cover expected operational losses with a high degree of certainty over a one-year horizon.
Eligible purchased wholesale exposure means a purchased wholesale exposure that:
(1) The bank holding company or securitization SPE purchased from an unaffiliated seller and did not directly or indirectly originate;
(2) Was generated on an arm's-length basis between the seller and the obligor (intercompany accounts receivable and receivables subject to contra-accounts between firms that buy and sell to each other do not satisfy this criterion);
(3) Provides the bank holding company or securitization SPE with a claim on all proceeds from the exposure or a pro rata interest in the proceeds from the exposure;
(4) Has an M of less than one year; and
(5) When consolidated by obligor, does not represent a concentrated exposure relative to the portfolio of purchased wholesale exposures.
Eligible securitization guarantor means:
(1) A sovereign entity, the Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Commission, a Federal Home Loan Bank, Federal Agricultural Mortgage Corporation (Farmer Mac), a multilateral development bank, a depository institution, a bank holding company, a savings and loan holding company (as defined in 12 U.S.C. 1467a) provided all or substantially all of the holding company's activities are permissible for a financial holding company under 12 U.S.C. 1843(k), a foreign bank (as defined in § 211.2 of the Federal Reserve Board's Regulation K (12 CFR 211.2)), or a securities firm;
(2) Any other entity (other than a securitization SPE) that has issued and outstanding an unsecured long-term debt security without credit enhancement that has a long-term applicable external rating in one of the three highest investment-grade rating categories; or
(3) Any other entity (other than a securitization SPE) that has a PD assigned by the bank holding company that is lower than or equal to the PD associated with a long-term external rating in the third highest investment-grade rating category.
(3) The servicer has no legal obligation to, and does not, make advances to the securitization if the servicer concludes the advances are unlikely to be repaid.
(1) A security or instrument (whether voting or non-voting) that represents a direct or indirect ownership interest in, and is a residual claim on, the assets and income of a company, unless:
(i) The issuing company is consolidated with the bank holding company under GAAP;
(ii) The bank holding company is required to deduct the ownership interest from tier 1 or tier 2 capital under this appendix;
Excess spread for a period means:
(1) Gross finance charge collections and other income received by a securitization SPE (including market interchange fees) over a period minus interest paid to the holders of the securitization exposures, servicing fees, charge-offs, and other senior trust or similar expenses of the SPE over the period; divided by
(2) The principal balance of the underlying exposures at the end of the period.
Excluded mortgage exposure means any one- to four-family residential pre-sold construction loan for a residence for which the purchase contract is cancelled that would receive a 100 percent risk weight under section 618(a)(2) of the Resolution Trust Corporation Refinancing, Restructuring, and Improvement Act and under 12 CFR part 225, appendix A, section III.C.3.
(2) For all other wholesale exposures to non-defaulted obligors or segments of non-defaulted retail exposures, the product of PD times LGD times EAD for the exposure or segment.
(3) For a wholesale exposure to a defaulted obligor or segment of defaulted retail exposures, the bank holding company's impairment estimate for allowance purposes for the exposure or segment.
(4) Total ECL is the sum of expected credit losses for all wholesale and retail exposures other than exposures for which the bank holding company has applied the double default treatment in section 34 of this appendix.
Expected exposure (EE) means the expected value of the probability distribution of non-negative credit risk exposures to a counterparty at any specified future date before the maturity date of the longest term transaction in the netting set. Any negative market values in the probability distribution of market values to a counterparty at a specified future date are set to zero to convert the probability distribution of market values to the probability distribution of credit risk exposures.
Expected operational loss (EOL) means the expected value of the distribution of potential aggregate operational losses, as generated by the bank holding company's operational risk quantification system using a one-year horizon.
Expected positive exposure (EPE) means the weighted average over time of expected (non-negative) exposures to a counterparty where the weights are the proportion of the time interval that an individual expected exposure represents. When calculating risk-based capital requirements, the average is taken over a one-year horizon.
Exposure at default (EAD). (1) For the on-balance sheet component of a wholesale exposure or segment of retail exposures (other than an OTC derivative contract, or a repo-style transaction or eligible margin loan for which the bank holding company determines EAD under section 32 of this appendix), EAD means:
(i) If the exposure or segment is a security classified as available-for-sale, the bank holding company's carrying value (including net accrued but unpaid interest and fees) for the exposure or segment less any allocated transfer risk reserve for the exposure or segment, less any unrealized gains on the exposure or segment, and plus any unrealized losses on the exposure or segment; or
(ii) If the exposure or segment is not a security classified as available-for-sale, the bank holding company's carrying value (including net accrued but unpaid interest and fees) for the exposure or segment less any allocated transfer risk reserve for the exposure or segment.
(2) For the off-balance sheet component of a wholesale exposure or segment of retail exposures (other than an OTC derivative contract, or a repo-style transaction or eligible margin loan for which the bank holding company determines EAD under section 32 of this appendix) in the form of a loan commitment, line of credit, trade-related letter of credit, or transaction-related contingency, EAD means the bank holding company's best estimate of net additions to the outstanding amount owed the bank holding company, including estimated future additional draws of principal and accrued but unpaid interest and fees, that are likely to occur over a one-year horizon assuming the wholesale exposure or the retail exposures in the segment were to go into default. This estimate of net additions must reflect what would be expected during economic downturn conditions. Trade-related letters of credit are short-term, self-liquidating instruments that are used to finance the movement of goods and are collateralized by the underlying goods. Transaction-related contingencies relate to a particular transaction and include, among other things, performance bonds and performance-based letters of credit.
(3) For the off-balance sheet component of a wholesale exposure or segment of retail exposures (other than an OTC derivative contract, or a repo-style transaction or eligible margin loan for which the bank holding company determines EAD under section 32 of this appendix) in the form of anything other than a loan commitment, line of credit, trade-related letter of credit, or transaction-related contingency, EAD means the notional amount of the exposure or segment.
(4) EAD for OTC derivative contracts is calculated as described in section 32 of this appendix. A bank holding company also may determine EAD for repo-style transactions and eligible margin loans as described in section 32 of this appendix.
(5) For wholesale or retail exposures in which only the drawn balance has been securitized, the bank holding company must reflect its share of the exposures' undrawn balances in EAD. Undrawn balances of revolving exposures for which the drawn balances have been securitized must be allocated between the seller's and investors' interests on a pro rata basis, based on the proportions of the seller's and investors' shares of the securitized drawn balances.
Exposure category means any of the wholesale, retail, securitization, or equity exposure categories.
External operational loss event data means, with respect to a bank holding company, gross operational loss amounts, dates, recoveries, and relevant causal information for operational loss events occurring at organizations other than the bank holding company.
External rating means a credit rating that is assigned by an NRSRO to an exposure, provided:
(1) The credit rating fully reflects the entire amount of credit risk with regard to all payments owed to the holder of the exposure. If a holder is owed principal and interest on an exposure, the credit rating must fully reflect the credit risk associated with timely repayment of principal and interest. If a holder is owed only principal on an exposure, the credit rating must fully reflect only the credit risk associated with timely repayment of principal; and
(2) The credit rating is published in an accessible form and is or will be included in the transition matrices made publicly available by the NRSRO that summarize the historical performance of positions rated by the NRSRO.
(i) Cash on deposit with the bank holding company (including cash held for the bank holding company by a third-party custodian or trustee);
(iii) Long-term debt securities that have an applicable external rating of one category below investment grade or higher;
(iv) Short-term debt instruments that have an applicable external rating of at least investment grade;
(v) Equity securities that are publicly traded;
(vi) Convertible bonds that are publicly traded;
(vii) Money market mutual fund shares and other mutual fund shares if a price for the shares is publicly quoted daily; or
(viii) Conforming residential mortgages; and
(2) In which the bank holding company has a perfected, first priority security interest or, outside of the United States, the legal equivalent thereof (with the exception of cash on deposit and notwithstanding the prior security interest of any custodial agent).
Gain-on-sale means an increase in the equity capital (as reported on Schedule HC of the FR Y-9C Report) of a bank holding company that results from a securitization (other than an increase in equity capital that results from the bank holding company's receipt of cash in connection with the securitization).
Guarantee means a financial guarantee, letter of credit, insurance, or other similar financial instrument (other than a credit derivative) that allows one party (beneficiary) to transfer the credit risk of one or more specific exposures (reference exposure) to another party (protection provider). See also eligible guarantee.
High volatility commercial real estate (HVCRE) exposure means a credit facility that finances or has financed the acquisition, development, or construction (ADC) of real property, unless the facility finances:
(1) One- to four-family residential properties; or
(i) The loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio in the relevant agency's real estate lending standards at 12 CFR part 34, Subpart D (OCC), 12 CFR part 208, appendix C (Federal Reserve); 12 CFR part 365, Subpart D (FDIC); and 12 CFR 560.100-560.101 (OTS).
(iii) The borrower contributed the amount of capital required by paragraph (2)(ii) of this definition before the bank holding company advances funds under the credit facility, and the capital contributed by the borrower, or internally generated by the project, is contractually required to remain in the project throughout the life of the project. The life of a project concludes only when the credit facility is converted to permanent financing or is sold or paid in full. Permanent financing may be provided by the bank holding company that provided the ADC facility as long as the permanent financing is subject to the bank holding company's underwriting criteria for long-term mortgage loans.
Inferred rating. A securitization exposure has an inferred rating equal to the external rating referenced in paragraph (2)(i) of this definition if:
(1) The securitization exposure does not have an external rating; and
(2) Another securitization exposure issued by the same issuer and secured by the same underlying exposures:
(i) Has an external rating;
(ii) Is subordinated in all respects to the unrated securitization exposure;
(iii) Does not benefit from any credit enhancement that is not available to the unrated securitization exposure; and
(iv) Has an effective remaining maturity that is equal to or longer than that of the unrated securitization exposure.
Internal operational loss event data means, with respect to a bank holding company, gross operational loss amounts, dates, recoveries, and relevant causal information for operational loss events occurring at the bank holding company.
Investing bank holding company means, with respect to a securitization, a bank holding company that assumes the credit risk of a securitization exposure (other than an originating bank holding company of the securitization). In the typical synthetic securitization, the investing bank holding company sells credit protection on a pool of underlying exposures to the originating bank holding company.
(1) All or substantially all of the assets of which are financial assets; and
Investors' interest EAD means, with respect to a securitization, the EAD of the underlying exposures multiplied by the ratio of:
(1) The total amount of securitization exposures issued by the securitization SPE to investors; divided by
(2) The outstanding principal amount of underlying exposures.
(ii) The bank holding company's empirically based best estimate of the long-run default-weighted average economic loss, per dollar of EAD, the bank holding company would expect to incur if the obligor (or a typical obligor in the loss severity grade assigned by the bank holding company to the exposure) were to default within a one-year horizon over a mix of economic conditions, including economic downturn conditions; or
(iii) The bank holding company's empirically based best estimate of the economic loss, per dollar of EAD, the bank holding company would expect to incur if the obligor (or a typical obligor in the loss severity grade assigned by the bank holding company to the exposure) were to default within a one-year horizon during economic downturn conditions.
(ii) The bank holding company's empirically based best estimate of the long-run default-weighted average economic loss, per dollar of EAD, the bank holding company would expect to incur if the exposures in the segment were to default within a one-year horizon over a mix of economic conditions, including economic downturn conditions; or
(iii) The bank holding company's empirically based best estimate of the economic loss, per dollar of EAD, the bank holding company would expect to incur if the exposures in the segment were to default within a one-year horizon during economic downturn conditions.
Main index means the Standard & Poor's 500 Index, the FTSE All-World Index, and any other index for which the bank holding company can demonstrate to the satisfaction of the Federal Reserve that the equities represented in the index have comparable liquidity, depth of market, and size of bid-ask spreads as equities in the Standard & Poor's 500 Index and FTSE All-World Index.
Multilateral development bank means the International Bank for Reconstruction and Development, the International Finance Corporation, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the European Investment Fund, the Nordic Investment Bank, the Caribbean Development Bank, the Islamic Development Bank, the Council of Europe Development Bank, and any other multilateral lending institution or regional development bank in which the U.S. government is a shareholder or contributing member or which the Federal Reserve determines poses comparable credit risk.
Nationally recognized statistical rating organization (NRSRO) means an entity registered with the SEC as a nationally recognized statistical rating organization under section 15E of the Securities Exchange Act of 1934 (15 U.S.C. 78o-7).
Netting set means a group of transactions with a single counterparty that are subject to a qualifying master netting agreement or qualifying cross-product master netting agreement. For purposes of the internal models methodology in paragraph (d) of section 32 of this appendix, each transaction that is not subject to such a master netting agreement is its own netting set.
Obligor means the legal entity or natural person contractually obligated on a wholesale exposure, except that a bank holding company may treat the following exposures as having separate obligors:
(2) (i) An income-producing real estate exposure for which all or substantially all of the repayment of the exposure is reliant on the cash flows of the real estate serving as collateral for the exposure; the bank holding company, in economic substance, does not have recourse to the borrower beyond the real estate collateral; and no cross-default or cross-acceleration clauses are in place other than clauses obtained solely out of an abundance of caution; and
(3) (i) A wholesale exposure authorized under section 364 of the U.S. Bankruptcy Code (11 U.S.C. 3