Risk Management Manual of Examination Policies - FDIC

CAPITAL Section 2.1
Interests in Asset Securitizations, and Asset-Backed
and Mortgage-Backed Securities)
This rule amends the regulatory capital treatment of
recourse arrangements, direct credit substitutes, residual
interests in asset securitizations, and asset- and mortgagebacked
securities, better aligning regulatory capital
requirements with the risk associated with these positions.
The rule primarily affects banks involved in securitizationrelated
activities. However, it also includes banks that
service assets, guarantee the performance of a third party’s
assets, or invest in asset-backed and mortgage-backed
securities.
Components of Capital
Leverage Capital
Banks must maintain at least the minimum leverage ratio
requirement set forth in Part 325. The minimum leverage
ratio requirement consists only of Tier 1 (Core) Capital.
Tier 1 Capital or Core Capital is defined in Part 325 and
means the sum of:
• common stockholders' equity – the sum of common
stock and related surplus, undivided profits, disclosed
capital reserves that represent a segregation of
undivided profits, and foreign currency translation
adjustments, less net unrealized losses on availablefor-sale
equity securities with readily determinable fair
values;
• noncumulative perpetual preferred stock – perpetual
preferred stock (and related surplus) where the issuer
has the option to waive payment of dividends and
where the dividends so waived do not accumulate to
future periods nor do they represent a contingent claim
on the issuer. Preferred stock issues where the
dividend is reset periodically based, in whole or in
part, upon the bank's current credit standing, including
but not limited to, auction rate, money market and
remarketable preferred stock, are excluded from this
definition of noncumulative perpetual preferred stock,
regardless of whether the dividends are cumulative or
noncumulative;
• minority interests in consolidated subsidiaries –
minority interests in equity capital accounts of those
subsidiaries that have been consolidated for the
purpose of computing regulatory capital, except that
minority interests which fail to provide meaningful
capital support are excluded from this definition;
minus
• all intangible assets other than mortgage servicing
assets, nonmortgage servicing assets, and purchased
credit card relationships eligible for inclusion in core
capital as prescribed in Section 325.5. (F) –
Intangible assets represent those assets that are
required to be reported as intangible assets in a
banking institution’s "Reports of Condition and
Income" (Call Report) or in a savings association's
"Thrift Financial Report." Mortgage servicing assets
and nonmortgage servicing assets (collectively
servicing assets) as well as purchased credit card
relationships (PCCRs) are eligible for inclusion in core
capital with certain limitations. Generally, servicing
assets and PCCRs are limited to 100 percent of Tier 1
capital. In addition, nonmortgage servicing assets and
PCCRs are subject to a separate sublimit of 25 percent
of Tier 1 capital. Section RC-R of the Call Report
Instructions provides a worksheet that banks may use
to determine the amount of disallowed servicing assets
and PCCRs;
• noneligible credit-enhancing interest-only strips – A
credit-enhancing interest-only strip is defined in the
capital guidelines as "an on-balance sheet asset that, in
form or in substance represents the contractual right to
receive some or all of the interest due on transferred
assets; and exposes the bank to credit risk directly or
indirectly associated with the transferred assets that
exceeds a pro rata share of the bank’s claim on the
assets, whether through subordination provisions or
other credit enhancement techniques." Creditenhancing
interest-only strips include other similar
"spread" assets and can be either retained or
purchased. In general, credit-enhancing interest-only
strips are limited to 25 percent of Tier 1 capital.
Section RC-R of the Call Report Instructions provides
a worksheet that banks may use to determine the
amount of noneligible credit-enhancing interest-only
strips;
• deferred tax assets in excess of the limit set forth in
Section 325.5(g) – Deferred tax assets represent
reductions in future taxes payable as a result of
"temporary differences" and net operating loss or tax
credit carryforwards that exist at the reporting date.
Generally, deferred tax assets that are dependent upon
future taxable income are limited to the lesser of: (i)
the amount of such deferred tax assets that the bank
expects to realize within one year of the calendar
quarter-end date, based on its projected future taxable
income for that year or (ii) 10% of the amount of the
bank's Tier 1 capital; prior to deductions.
• identified losses (to the extent that Tier 1 capital
would have been reduced if the appropriate
accounting entries to reflect the identified losses had
been recorded on the institution's books) – Identified
losses represent those items that have been determined
by an evaluation made by a state or federal examiner
to be chargeable against income, capital, and/or
DSC Risk Management Manual of Examination Policies 2.1-3 Capital (12-04)
Federal Deposit Insurance Corporation