12 CFR Part 628 — Capital Adequacy of System Institutions

PART 628—CAPITAL ADEQUACY OF SYSTEM INSTITUTIONS Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 8.0, 8.3, 8.4, 8.6, 8.8, 8.10, 8.12 of the Farm Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243, 2252, 2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a), Pub. L. 100-233, 101 Stat. 1568, 1608 as amended by sec. 301(a), Pub. L. 103-399, 102 Stat 989, 993 (12 U.S.C. 2154 note); sec. 939A, Pub. L. 111-203, 124 Stat. 1326, 1887 (15 U.S.C. 78o-7 note). Source: 81 FR 49779, July 28, 2016, unless otherwise noted. Subpart A—General Provisions § 628.1 Purpose, applicability, and reservations of authority. (a) Purpose. (b) Limitation of authority. (c) Applicability. (1) Minimum capital requirements and overall capital adequacy standards. (2) Regulatory capital. (3) Risk-weighted assets. (ii) [Reserved] (4) Disclosures. (ii)-(iii) [Reserved] (d) Reservation of authority Additional capital in the aggregate. (2) Regulatory capital elements. (ii) Notwithstanding the criteria for regulatory capital instruments set forth in subpart C of this part, FCA may find that a capital element may be included in a System institution's CET1 capital, AT1 capital, or tier 2 capital on a permanent or temporary basis consistent with the loss absorption capacity of the element and in accordance with § 628.20(e). (3) Risk-weighted asset amounts. (4) Total leverage. (5) [Reserved] (6) Other reservation of authority. (e) Notice and response procedures. (f) [Reserved] § 628.2 Definitions. As used in this part: Additional tier 1 capital (AT1) Adjusted allowances for credit losses (AACL) Allocated equities 1 1 Bank holding company Bank Holding Company Act et seq. Bankruptcy remote Borrower stock Call Report Carrying value Central counterparty (CCP) CFTC Clean-up call Cleared transaction (1) The following transactions are cleared transactions: (i)-(ii) [Reserved] (iii) A transaction between a clearing member client System institution and a clearing member where the clearing member acts as a financial intermediary on behalf of the clearing member client and enters into an offsetting transaction with a CCP, provided that the requirements set forth in § 628.3(a) are met; or (iv) A transaction between a clearing member client System institution and a CCP where a clearing member guarantees the performance of the clearing member client System institution to the CCP and the transaction meets the requirements of § 628.3(a)(2) and (3). (2) [Reserved] Clearing member Clearing member client Collateral agreement (1) Under applicable law in the relevant jurisdictions, other than: (i) In receivership, conservatorship, or resolution under the Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any similar insolvency law applicable to Government-sponsored enterprises (GSEs), or laws of foreign jurisdictions that are substantially similar to the U.S. laws referenced in this paragraph (1)(i) in order to facilitate the orderly resolution of the defaulting counterparty; (ii) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (1)(i) of this definition; or (2) Other than to the extent necessary for the counterparty to comply with the requirements of part 47, subpart I of part 252, or part 382 of this title, as applicable. Commitment Commodity derivative contract Commodity Exchange Act et seq. Common cooperative equity issuance date (1) For allocated equities, the calendar quarter-ending in which: (i) The System institution's Board of Directors has passed a resolution declaring a patronage refund; and (ii) The System institution has completed the applicable accounting treatment by segregating the new allocated equities from its unallocated retained earnings. (2) For purchased stock (excluding statutory minimum borrower stock and third-party stock), the calendar quarter-ending in which the stock is acquired by the holder and recognized on the institution's balance sheet. Common cooperative equity or equities Common equity tier 1 capital (CET1) Company Corporate exposure (1) An exposure to a sovereign, the Bank for International Settlements, the European Central Bank, the European Commission, the International Monetary Fund, a multi-lateral development bank (MDB), a depository institution, a foreign bank, a credit union, or a public sector entity (PSE); (2) An exposure to a GSE; (3) A residential mortgage exposure; (4)-(5) [Reserved] (6) A high volatility commercial real estate (HVCRE) exposure; (7) A cleared transaction; (8) [Reserved] (9) A securitization exposure; (10) An equity exposure; or (11) An unsettled transaction. Country risk classification (CRC) Credit derivative Credit-enhancing interest-only strip (CEIO) (1) Represents a contractual right to receive some or all of the interest and no more than a minimal amount of principal due on the underlying exposures of a securitization; and (2) Exposes the holder of the CEIO 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 (1) Early default clauses and similar warranties that permit the return of, or premium refund clauses covering, 1-4 family residential first mortgage loans that qualify for a 50-percent risk weight for a period not to exceed 120 days from the date of transfer. These warranties may cover only those loans that were originated within 1 year of the date of transfer; (2) Premium refund clauses that cover assets guaranteed, in whole or in part, by the U.S. Government, a U.S. Government agency or a Government-sponsored enterprise (GSE), provided the premium refund clauses are for a period not to exceed 120 days from the date of transfer; or (3) Warranties that permit the return of underlying exposures in instances of misrepresentation, fraud, or incomplete documentation. Credit risk mitigant Credit union et seq. Current exposure Current exposure methodology Custodian Depository institution Depository institution holding company Derivative contract Dodd-Frank Act Early amortization provision (1) Is triggered solely by events not directly related to the performance of the underlying exposures or the originating System institution (such as material changes in tax laws or regulations); or (2) Leaves investors fully exposed to future draws by borrowers on the underlying exposures even after the provision is triggered. Effective notional Eligible clean-up call (1) Is exercisable solely at the discretion of the originating System institution or servicer; (2) Is not structured to avoid allocating losses to securitization exposures held by investors or otherwise structured to provide credit enhancement to the securitization; and (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 (ii) For a synthetic securitization, is only exercisable when 10 percent or less of the principal amount of the reference portfolio of underlying exposures (determined as of the inception of the securitization) is outstanding. Eligible credit derivative th (1) The contract meets the requirements of an eligible guarantee and has been confirmed by the protection purchaser and the protection provider; (2) Any assignment of the contract has been confirmed by all relevant parties; (3) If the credit derivative is a credit default swap or n th (i) Failure to pay any amount due under the terms of the reference exposure, subject to any applicable minimal payment threshold that is consistent with standard market practice and with a grace period that is closely in line with the grace period of the reference exposure; and (ii) Receivership, insolvency, liquidation, conservatorship or inability of the reference exposure issuer to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and similar events; (4) The terms and conditions dictating the manner in which the contract is to be settled are incorporated into the contract; (5) If the contract allows for cash settlement, the contract incorporates a robust valuation process to estimate loss reliably and specifies a reasonable period for obtaining post-credit event valuations of the reference exposure; (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 provide that any required consent to transfer may not be unreasonably withheld; (7) If the credit derivative is a credit default swap or n th (8) If the credit derivative is a total return swap and the System institution records net payments received on the swap as net income, the System institution records offsetting deterioration in the value of the hedged exposure (either through reductions in fair value or by an addition to reserves). Eligible guarantee (1) Is written; (2) Is either: (i) Unconditional; or (ii) A contingent obligation of the U.S. Government or its agencies, the enforceability of which is dependent upon some affirmative action on the part of the beneficiary of the guarantee or a third party (for example, meeting servicing requirements); (3) Covers all or a pro rata portion of all contractual payments of the obligated party on the reference exposure; (4) Gives the beneficiary a direct claim against the protection provider; (5) Is not unilaterally cancelable by the protection provider for reasons other than the breach of the contract by the beneficiary; (6) Except for a guarantee by a sovereign, 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; (7) Requires the protection provider to make payment to the beneficiary on the occurrence of a default (as defined in the guarantee) of the obligated party on the reference exposure in a timely manner without the beneficiary first having to take legal actions to pursue the obligor for payment; and (8) 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. Eligible guarantor (1) A sovereign, 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 (MDB), a depository institution, a bank holding company, a savings and loan holding company, a credit union, a foreign bank, or a qualifying central counterparty; or (2) An entity (other than a special purpose entity): (i) That at the time the guarantee is issued or anytime thereafter, has issued and outstanding an unsecured debt security without credit enhancement that is investment grade; (ii) Whose creditworthiness is not positively correlated with the credit risk of the exposures for which it has provided guarantees; and (iii) That is not an insurance company engaged predominately in the business of providing credit protection (such as a monoline bond insurer or re-insurer). Eligible margin loan (1) An extension of credit where: (i) The extension of credit is collateralized exclusively by liquid and readily marketable debt or equity securities, or gold; (ii) The collateral is marked-to-fair value daily, and the transaction is subject to daily margin maintenance requirements; and (iii) The extension of credit is conducted under an agreement that provides the System institution 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 receivership, insolvency, liquidation, conservatorship, or similar proceeding, of the counterparty, provided that, in any such case: (A) Any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than: ( 1 2 1 2 ( 2 1 (B) The agreement may limit the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty to the extent necessary for the counterparty to comply with the requirements of part 47, subpart I of part 252, or part 382 of this title, as applicable. (2) In order to recognize an exposure as an eligible margin loan for purposes of this subpart, a System institution must comply with the requirements of § 628.3(b) with respect to that exposure. Eligible servicer cash advance facility (1) The servicer is entitled to full reimbursement of advances, except that a servicer may be obligated to make non-reimbursable advances for a particular underlying exposure if any such advance is contractually limited to an insignificant amount of the outstanding principal balance of that exposure; (2) The servicer's right to reimbursement is senior in right of payment to all other claims on the cash flows from the underlying exposures of the securitization; and (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. Equity derivative contract Equity exposure (1) A security or instrument (whether voting or non-voting) that represents a direct or an 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 System institution under GAAP; (ii) The System institution is required to deduct the ownership interest from tier 1 or tier 2 capital under this part; (iii) The ownership interest incorporates a payment or other similar obligation on the part of the issuing company (such as an obligation to make periodic payments); or (iv) The ownership interest is a securitization exposure; (2) A security or instrument that is mandatorily convertible into a security or instrument described in paragraph (1) of this definition; (3) An option or warrant that is exercisable for a security or instrument described in paragraph (1) of this definition; or (4) Any other security or instrument (other than a securitization exposure) to the extent the return on the security or instrument is based on the performance of a security or instrument described in paragraph (1) of this definition. ERISA et seq. Exchange rate derivative Exposure Exposure amount (1) For the on-balance sheet component of an exposure (other than an available-for-sale or held-to-maturity security; an OTC derivative contract; a repo-style transaction or an eligible margin loan for which the System institution determines the exposure amount under § 628.37; a cleared transaction; or a securitization exposure), the System institution's carrying value of the exposure. (2) For a security (that is not a securitization exposure, equity exposure, or preferred stock classified as an equity security under GAAP) classified as available-for-sale or held-to-maturity, the System institution's carrying value (including net accrued but unpaid interest and fees) for the exposure less any net unrealized gains on the exposure and plus any net unrealized losses on the exposure. (3) For available-for-sale preferred stock classified as an equity security under GAAP, the System institution's carrying value of the exposure less any net unrealized gains on the exposure that are reflected in such carrying value but excluded from the System institution's regulatory capital components. (4) For the off-balance sheet component of an exposure (other than an OTC derivative contract; a repo-style transaction or an eligible margin loan for which the System institution calculates the exposure amount under § 628.37; a cleared transaction; or a securitization exposure), the notional amount of the off-balance sheet component multiplied by the appropriate credit conversion factor (CCF) in § 628.33. (5) For an exposure that is an OTC derivative contract, the exposure amount determined under § 628.34. (6) For an exposure that is a cleared transaction, the exposure amount determined under § 628.35. (7) For an exposure that is an eligible margin loan or repo-style transaction for which the bank calculates the exposure amount as provided in § 628.37, the exposure amount determined under § 628.37. (8) For an exposure that is a securitization exposure, the exposure amount determined under § 628.42. Farm Credit Act et seq. Federal Deposit Insurance Act Federal Deposit Insurance Corporation Improvement Act Financial collateral (1) In the form of: (i) Cash on deposit at a depository institution or Federal Reserve Bank (including cash held for the System institution by a third-party custodian or trustee); (ii) Gold bullion; (iii) Long-term debt securities that are not resecuritization exposures and that are investment grade; (iv) Short-term debt instruments that are not resecuritization exposures and that are investment grade; (v) Equity securities that are publicly traded; (vi) Convertible bonds that are publicly traded; or (vii) Money market fund shares and other mutual fund shares if a price for the shares is publicly quoted daily; and (2) In which the System institution has a perfected, first-priority security interest or, outside of the United States, the legal equivalent thereof (with the exception of cash on deposit at a depository institution or Federal Reserve Bank and notwithstanding the prior security interest of any custodial agent). First-lien residential mortgage exposure Foreign bank Forward agreement GAAP Gain-on-sale General obligation Government-sponsored enterprise (GSE) Guarantee High volatility commercial real estate (HVCRE) exposure (1) A credit facility secured by land or improved real property that, prior to being reclassified by the System institution as a non-HVCRE exposure pursuant to paragraph (6) of this definition: (i) Primarily finances, has financed, or refinances the acquisition, development, or construction of real property; (ii) Has the purpose of providing financing to acquire, develop, or improve such real property into income producing real property; and (iii) Is dependent upon future income or sales proceeds from, or refinancing of, such real property for the repayment of such credit facility. (2) An HVCRE exposure does not include a credit facility financing: (i) The acquisition, development, or construction of properties that are: (A) One- to four-family residential properties, provided that the dwelling (including attached components such as garages, porches, and decks) represents at least 50 percent of the total appraised value of the collateral secured by the first or subsequent lien. Credit facilities that do not finance the construction of one- to four-family residential structures, but instead solely finance improvements such as the laying of sewers, water pipes, and similar improvements to land, do not qualify for the one- to four-family residential properties exclusion; (B) [Reserved] (C) Agricultural land, as defined in § 619.9025 of this chapter, or real estate used as an integral part of an aquatic operation. This provision applies only to financing for the agricultural and aquatic needs of bona fide farmers, ranchers, and producers and harvesters of aquatic products under § 613.3000 of this chapter. This provision does not apply to loans for farm property construction and land development purposes; (ii) The acquisition or refinance of existing income-producing real property secured by a mortgage on such property, if the cash flow being generated by the real property is sufficient to support the debt service and expenses of the real property, in accordance with the System institution's applicable loan underwriting criteria for permanent financings; (iii) Improvements to existing income producing improved real property secured by a mortgage on such property, if the cash flow being generated by the real property is sufficient to support the debt service and expenses of the real property, in accordance with the System institution's applicable loan underwriting criteria for permanent financings; or (iv) Commercial real property projects in which: (A) The loan-to-value ratio is less than or equal to the applicable loan-to-value limit set forth in Appendix A to this part; (B) The borrower has contributed capital of at least 15 percent of the real property's appraised, “as completed” value to the project. The use of an “as is” appraisal is allowed in instances where an “as completed” value appraisal is not available. The use of an evaluation of the real property instead of an appraisal to determine the “as completed” appraised value is allowed if § 614.4260(c) of this chapter permits evaluations to be used in lieu of appraisals. The contribution may be in the form of: ( 1 ( 2 ( 3 or ( 4 (C) The borrower contributed the amount of capital required by paragraph (2)(iv)(B) of this definition before the System institution advances funds (other than the advance of a nominal sum made in order to secure the System institution's lien against the real property) under the credit facility, and such minimum amount of capital contributed by the borrower is contractually required to remain in the project until the HVCRE exposure has been reclassified by the System institution as a non-HVCRE exposure under paragraph (6) of this definition. (v) Loans originated for less than $500,000. (3) An HVCRE exposure does not include any loan made prior to January 1, 2025. (4) An HVCRE exposure does not include a credit facility reclassified as a non-HVCRE exposure under paragraph (6) of this definition. (5) Value of contributed real property: For the purposes of this HVCRE exposure definition, the value of any real property contributed by a borrower as a capital contribution is the appraised value of the property as determined under standards prescribed in accordance with FCA regulations at subpart F of part 614 of this chapter, in connection with the extension of the credit facility or loan to such borrower. (6) Reclassification as a non-HVCRE exposure: For purposes of this HVCRE exposure definition and with respect to a credit facility and a System institution, a System institution may reclassify an HVCRE exposure as a non-HVCRE exposure upon: (i) The substantial completion of the development or construction of the real property being financed by the credit facility; and (ii) Cash flow being generated by the real property being sufficient to support the debt service and expenses of the real property, in accordance with the System institution's applicable loan underwriting criteria for permanent financings. (7) [Reserved] Home country Insurance company Insurance underwriting company Insured depository institution Interest rate derivative contract International Lending Supervision Act Investment fund (1) Where all or substantially all of the assets of the company are financial assets; and (2) That has no material liabilities. Investment grade Junior-lien residential mortgage exposure Member Money market fund Mortgage servicing assets (MSAs) Multilateral development bank (MDB) National Bank Act Netting set (1) That is not subject to such a master netting agreement; or (2) Where the System institution has identified specific wrong-way risk. Nonqualified allocated equities (1) Those subject to revolvement; and (2) Those not subject to revolvement. The second type for GAAP purposes is generally considered an equivalent of unallocated surplus and consolidated with unallocated surplus on externally prepared shareholder reports. N th to-default credit derivative Operating entity Original maturity (1) For a commitment that is not subject to extension or renewal, the stated expiration date of the commitment; or (2) For a commitment that is subject to extension or renewal, the earliest date on which the System institution can, at its option, unconditionally cancel the commitment. Originating System institution, (1) Directly or indirectly originated the underlying exposures included in the securitization; or (2) [Reserved] Other financing institution (OFI) Over-the-counter (OTC) derivative contract Participation certificate Patronage payment Performance standby letter of credit (or performance bond) Protection amount (P) Publicly traded (1) Any exchange registered with the Securities and Exchange Commission (SEC) as a national securities exchange under section 6 of the Securities Exchange Act; or (2) Any non-U.S.-based securities exchange that: (i) Is registered with, or approved by, a national securities regulatory authority; and (ii) Provides a liquid, two-way market for the instrument in question. Public sector entity (PSE) Qualified allocated equities Qualifying central counterparty (QCCP) (1)(i) Is a designated financial market utility (FMU), as defined in section 803 of the Dodd-Frank Act; (ii) If not located in the United States, is regulated and supervised in a manner equivalent to a designated FMU; or (iii) Meets the following standards: (A) The central counterparty requires all parties to contracts cleared by the counterparty to be fully collateralized on a daily basis; (B) The System institution demonstrates to the satisfaction of the FCA that the central counterparty: ( 1 ( 2 ( 3 (2)(i) Provides the System institution with the central counterparty's hypothetical capital requirement or the information necessary to calculate such hypothetical capital requirement, and other information the System institution is required to obtain under § 628.35(d)(3); (ii) Makes available to the FCA and the CCP's regulator the information described in paragraph (2)(i) of this definition; and (iii) Has not otherwise been determined by the FCA to not be a QCCP due to its financial condition, risk profile, failure to meet supervisory risk management standards, or other weaknesses or supervisory concerns that are inconsistent with the risk weight assigned to qualifying central counterparties under § 628.35. (3) A QCCP that fails to meet the requirements of a QCCP in the future may still be treated as a QCCP under the conditions specified in § 628.3(f). Qualifying master netting agreement (1) The agreement creates a single legal obligation for all individual transactions covered by the agreement upon an event of default following any stay permitted by paragraph (2) of this definition, including upon an event of receivership, conservatorship, insolvency, liquidation, or similar proceeding, of the counterparty; (2) The agreement provides the System institution the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default, including upon an event of receivership, conservatorship, insolvency, liquidation, or similar proceeding, of the counterparty, provided that, in any such case: (i) Any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than: (A) In receivership, conservatorship, or resolution under the Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any similar insolvency law applicable to GSEs, or laws of foreign jurisdictions that are substantially similar to the U.S. laws referenced in this paragraph (2)(i)(A) in order to facilitate the orderly resolution of the defaulting counterparty; or (B) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (2)(i)(A) of this definition; and (ii) The agreement may limit the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty to the extent necessary for the counterparty to comply with the requirements of part 47, subpart I of part 252, or part 382 of this title, as applicable; (3) The agreement does not contain a walkaway clause (that is, a provision that permits a non-defaulting counterparty to make a lower payment than it otherwise would make under the agreement, or no payment at all, to a defaulter or the estate of a defaulter, even if the defaulter or the estate of the defaulter is a net creditor under the agreement); and (4) In order to recognize an agreement as a qualifying master netting agreement for purposes of this subpart, a System institution must comply with the requirements of § 628.3(d) with respect to that agreement. Repo-style transaction (1) The transaction is based solely on liquid and readily marketable securities, cash, or gold; (2) The transaction is marked-to-fair value daily and subject to daily margin maintenance requirements; (3)(i) The transaction is a “securities contract” or “repurchase agreement” under section 555 or 559, respectively, of the Bankruptcy Code (11 U.S.C. 555 or 559), a qualified financial contract under section 11(e)(8) of the Federal Deposit Insurance Act, or a netting contract between or among financial institutions under sections 401-407 of the Federal Deposit Insurance Corporation Improvement Act or the Federal Reserve's Regulation EE (12 CFR part 231); or (ii) If the transaction does not meet the criteria set forth in paragraph (3)(i) of this definition, then either: (A) The transaction is executed under an agreement that provides the System institution the right to accelerate, terminate, and close-out the transaction on a net basis and to liquidate or set-off collateral promptly upon an event of default, including upon an event of receivership, insolvency, liquidation, or similar proceeding, of the counterparty, provided that, in any such case: ( 1 ( i 1 i ( ii 1 i ( 2 (B) The transaction is: ( 1 ( 2 (4) In order to recognize an exposure as a repo-style transaction for purposes of this subpart, a System institution must comply with the requirements of § 628.3(e) with respect to that exposure. Resecuritization Resecuritization exposure (1) An on- or off-balance sheet exposure to a resecuritization; or (2) An exposure that directly or indirectly references a resecuritization exposure. Residential mortgage exposure (1) An exposure that is primarily secured by a first or subsequent lien on one-to-four family residential property, provided that the dwelling (including attached components such as garages, porches, and decks) represents at least 50 percent of the total appraised value of the collateral secured by the first or subsequent lien; or (2) [Reserved] Revenue obligation Savings and loan holding company Securities and Exchange Commission (SEC) Securities Exchange Act Securitization exposure (1) An on-balance sheet or off-balance sheet credit exposure (including credit-enhancing representations and warranties) that arises from a traditional securitization or synthetic securitization (including a resecuritization); or (2) An exposure that directly or indirectly references a securitization exposure described in paragraph (1) of this definition. Securitization special purpose entity (securitization SPE) Servicer cash advance facility Small Business Act Small Business Investment Act Sovereign Sovereign default Sovereign exposure (1) A direct exposure to a sovereign; or (2) An exposure directly and unconditionally backed by the full faith and credit of a sovereign. Standardized total risk-weighted assets (1) The sum of: (i) Total risk-weighted assets for general credit risk as calculated under § 628.31; (ii) Total risk-weighted assets for cleared transactions as calculated under § 628.35; (iii) Total risk-weighted assets for unsettled transactions as calculated under § 628.38; (iv) Total risk-weighted assets for securitization exposures as calculated under § 628.42; (v) Total risk-weighted assets for equity exposures as calculated under §§ 628.52 and 628.53; minus (vi) [Reserved] (2) Any amount of the System institution's adjusted allowance for credit losses that is not included in tier 2 capital. Subsidiary Synthetic exposure Synthetic securitization (1) All or a portion of the credit risk of one or more underlying exposures is retained or transferred to one or more third parties through the use of one or more credit derivatives or guarantees (other than a guarantee that transfers only the credit risk of an individual retail exposure); (2) The credit risk associated with the underlying exposures has been separated into at least two tranches reflecting different levels of seniority; (3) Performance of the securitization exposures depends upon the performance of the underlying exposures; and (4) All or substantially all of the underlying exposures are financial exposures (such as loans, commitments, credit derivatives, guarantees, receivables, asset-backed securities, mortgage-backed securities, other debt securities, or equity securities). System bank System institution Tier 1 capital Tier 2 capital Total capital Traditional securitization (1) All or a portion of the credit risk of one or more underlying exposures is transferred to one or more third parties other than through the use of credit derivatives or guarantees; (2) The credit risk associated with the underlying exposures has been separated into at least two tranches reflecting different levels of seniority; (3) Performance of the securitization exposures depends upon the performance of the underlying exposures; (4) All or substantially all of the underlying exposures are financial exposures (such as loans, commitments, credit derivatives, guarantees, receivables, asset-backed securities, mortgage-backed securities, other debt securities, or equity securities); (5) The underlying exposures are not owned by an operating entity; (6) The underlying exposures are not owned by a rural business investment company described in 7 U.S.C. 2009cc et seq.; (7) [Reserved] (8) The FCA may determine that a transaction in which the underlying exposures are owned by an investment firm that exercises substantially unfettered control over the size and composition of its assets, liabilities, and off-balance sheet exposures is not a traditional securitization based on the transaction's leverage, risk profile, or economic substance; (9) The FCA may deem a transaction that meets the definition of a traditional securitization, notwithstanding paragraph (5), (6), or (7) of this definition, to be a traditional securitization based on the transaction's leverage, risk profile, or economic substance; and (10) The transaction is not: (i) An investment fund; (ii) A collective investment fund (as defined in [12 CFR 9.18 (national bank) and 12 CFR 151.40 (Federal saving association) (OCC); 12 CFR 208.34 (Board)]; (iii) An employee benefit plan (as defined in paragraphs (3) and (32) of section 3 of ERISA), a “governmental plan” (as defined in 29 U.S.C. 1002(32)) that complies with the tax deferral qualification requirements provided in the Internal Revenue Code, or any similar employee benefit plan established under the laws of a foreign jurisdiction; (iv) A synthetic exposure to the capital of a System institution to the extent deducted from capital under § 628.22; or (v) Registered with the SEC under the Investment Company Act of 1940 (15 U.S.C. 80a-1) or foreign equivalents thereof. Tranche Two-way market Unallocated retained earnings (URE) Unallocated retained earnings (URE) equivalents (1) Designates as URE equivalents at the time of allocation (or on or before March 31, 2017, if allocated prior to January 1, 2017) and undertakes in its capitalization bylaws or a currently effective board of directors resolution not to change the designation without prior FCA approval; and (2) Undertakes, in its capitalization bylaws or a currently effective board of directors resolution, not to exercise its discretion to revolve except upon dissolution or liquidation and not to offset against a loan in default except as required under final order of a court of competent jurisdiction or if required under § 615.5290 of this chapter in connection with a restructuring under part 617 of this chapter. Unconditionally cancelable Underlying exposures U.S. Government agency [81 FR 49779, July 28, 2016, as amended at 86 FR 54357, Oct. 1, 2021; 87 FR 27493, May 9, 2022; 89 FR 25129, Apr. 10, 2024] § 628.3 Operational requirements for certain exposures. For purposes of calculating risk-weighted assets under subpart D of this part: (a) Cleared transaction. (1) The offsetting transaction must be identified by the CCP as a transaction for the clearing member client. (2) The collateral supporting the transaction must be held in a manner that prevents the System institution from facing any loss due to an event of default, including from a liquidation, receivership, insolvency, or similar proceeding of either the clearing member or the clearing member's other clients. Omnibus accounts established under 17 CFR parts 190 and 300 satisfy the requirements of this paragraph (a). (3) The System institution must conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that in the event of a legal challenge (including one resulting from a default or receivership, insolvency, liquidation, or similar proceeding) the relevant court and administrative authorities would find the arrangements of paragraph (a)(2) of this section to be legal, valid, binding and enforceable under the law of the relevant jurisdictions. (4) The offsetting transaction with a clearing member must be transferable under the transaction documents and applicable laws in the relevant jurisdiction(s) to another clearing member should the clearing member default, become insolvent, or enter receivership, insolvency, liquidation, or similar proceedings. (b) Eligible margin loan. (1) Meets the requirements of paragraph (1)(iii) of the definition of “eligible margin loan” in § 628.2; and (2) Is legal, valid, binding, and enforceable under applicable law in the relevant jurisdictions. (c) [Reserved] (d) Qualifying master netting agreement. (1) Conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that: (i) The agreement meets the requirements of paragraph (2) of the definition of “qualifying master netting agreement” in § 628.2; and (ii) In the event of a legal challenge (including one resulting from default or from receivership, insolvency, liquidation, or similar proceeding) the relevant court and administrative authorities would find the agreement to be legal, valid, binding, and enforceable under the law of the relevant jurisdictions; and (2) Establish and maintain written procedures to monitor possible changes in relevant law and to ensure that the agreement continues to satisfy the requirements of the definition of “qualifying master netting agreement” in § 628.2. (e) Repo-style transaction. (1) Meets the requirements of paragraph (3) of the definition of “repo-style transaction” in § 628.2, and (2) Is legal, valid, binding, and enforceable under applicable law in the relevant jurisdictions. (f) Failure of a QCCP to satisfy the rule's requirements. §§ 628.4-628.9 [Reserved] Subpart B—Capital Ratio Requirements and Buffers § 628.10 Minimum capital requirements. (a) Computation of regulatory capital ratios. (b) Minimum capital requirements. (1) A common equity tier 1 (CET1) capital ratio of 4.5 percent. (2) A tier 1 capital ratio of 6 percent. (3) A total capital ratio of 8 percent. (4) A tier 1 leverage ratio of 4 percent, of which at least 1.5 percent must be composed of URE and URE equivalents. (5) [Reserved] (6) A permanent capital ratio of 7 percent. (c) Capital ratio calculations. (1) CET1 capital ratio. (2) Tier 1 capital ratio. (3) Total capital ratio. (4) Tier 1 leverage ratio. (ii) To calculate the measure of URE and URE equivalents described in paragraph (b)(4) of this section, a System institution must adjust URE and URE equivalents to reflect all the deductions and adjustments required under § 628.22(a), (b), and (c), and must use the denominator of the tier 1 leverage ratio. (5) Permanent capital ratio. (d) [Reserved] (e) Capital adequacy. (2) A System institution must have a process for assessing its overall capital adequacy in relation to its risk profile and a comprehensive strategy for maintaining an appropriate level of capital under § 615.5200 of this chapter. [81 FR 49779, July 28, 2016, as amended at 86 FR 54358, Oct. 1, 2021] § 628.11 Capital buffer amounts. (a) Capital conservation buffer and leverage buffer Composition of the capital conservation buffer and leverage buffer. (ii) The leverage buffer for the tier 1 leverage ratio is composed solely of tier 1 capital. (2) Definitions. (i) Eligible retained income. (ii) Maximum payout ratio. (iii) Maximum payout amount. (iv) [Reserved] (v) Maximum leverage payout ratio. (vi) Maximum leverage payout amount. (vii) Capital distribution (A) A reduction of tier 1 capital through the repurchase, redemption, or revolvement of a tier 1 capital instrument or by other means, except when a System institution, within the same quarter when the repurchase is announced, fully replaces a tier 1 capital instrument it has repurchased, redeemed, or revolved by issuing a purchased capital instrument that meets the eligibility criteria for: ( 1 ( 2 (B) A reduction of tier 2 capital through the repurchase, redemption prior to maturity, or revolvement of a tier 2 capital instrument or by other means, except when a System institution, within the same quarter when the repurchase, redemption, or revolvement is announced, fully replaces a tier 2 capital instrument it has repurchased, redeemed, or revolved by issuing a purchased capital instrument that meets the eligibility criteria for a tier 1 or tier 2 capital instrument; (C) A dividend declaration or payment on any tier 1 capital instrument; (D) A dividend declaration or interest payment on any capital instrument other than a tier 1 capital instrument if the System institution has full discretion to permanently or temporarily suspend such payments without triggering an event of default; (E) A cash patronage declaration or payment; (F) A patronage declaration in the form of allocated equities that did not qualify as tier 1 or tier 2 capital; or (G) Any similar transaction that the FCA determines to be in substance a distribution of capital. (viii) Discretionary bonus payment (A) The System institution retains discretion as to whether to make, and the amount of, the payment until the payment is awarded to the senior officer; (B) The amount paid is determined by the System institution without prior promise to, or agreement with, the senior officer; and (C) The senior officer has no contractual right, whether express or implied, to the bonus payment. (ix) Senior officer (3) Calculation of capital conservation buffer and leverage buffer. (A) The System institution's CET1 capital ratio minus the System institution's minimum CET1 capital ratio requirement under § 628.10; (B) The System institution's tier 1 capital ratio minus the System institution's minimum tier 1 capital ratio requirement under § 628.10; (C) The System institution's total capital ratio minus the System institution's minimum total capital ratio requirement under § 628.10; and (D) The System institution's tier 1 leverage ratio minus the System institution's minimum tier 1 leverage ratio requirement under § 628.10. (ii) Notwithstanding paragraphs (a)(3)(i)(A) through (D) of this section, if the System institution's CET1 capital ratio, tier 1 capital ratio, total capital ratio or tier 1 leverage ratio is less than or equal to the System institution's minimum CET1 capital ratio, tier 1 capital ratio, total capital ratio or tier 1 leverage ratio requirement under § 628.10, respectively, the System institution's capital conservation buffer or leverage buffer is zero. (4) Limits on capital distributions and discretionary bonus payments. (ii) A System institution that has a capital conservation buffer that is greater than 2.5 percent and a leverage buffer that is greater than 1.0 percent is not subject to a maximum payout amount or maximum leverage payout amount under this section. (iii) Negative eligible retained income. (A) Eligible retained income is negative; and (B) Capital conservation buffer was less than 2.5 percent, or the leverage buffer was less than 1.0 percent, as of the end of the previous calendar quarter. (iv) Prior approval Table 1 to § 628.11—Calculation of Maximum Payout Amount Capital conservation buffer Maximum >2.500 percent No limitation. ≤2.500 percent, and >1.875 percent 60 percent. ≤1.875 percent, and >1.250 percent 40 percent. ≤1.250 percent, and >0.625 percent 20 percent. ≤0.625 percent 0 percent. Table 2 to § 628.11—Calculation of Maximum Leverage Payout Amount Leverage buffer Maximum >1.00 percent No limitation. ≤1.00 percent, and >0.75 percent 60 percent. ≤0.75 percent, and >0.50 percent 40 percent. ≤0.50 percent, and >0.25 percent 20 percent. ≤0.25 percent 0 percent. (v) Other limitations on (vi) A System institution is subject to the lower of the maximum payout amount as determined under paragraph (a)(2)(iii) of this section and the maximum leverage payout amount as determined under paragraph (a)(2)(vi) of this section. (b) [Reserved] §§ 628.12-628.19 [Reserved] Subpart C—Definition of Capital § 628.20 Capital components and eligibility criteria for tier 1 and tier 2 capital instruments. (a) Regulatory capital components. (1) CET1 capital; (2) AT1 capital; and (3) Tier 2 capital. (b) CET1 capital. (1) Any common cooperative equity instrument issued by a System institution that meets all of the following criteria: (i) The instrument is paid-in, issued directly by the System institution, and represents the most subordinated claim in a receivership, insolvency, liquidation, or similar proceeding of the System institution; (ii) The holder of the instrument is entitled to a claim on the residual assets of the System institution after all senior claims have been satisfied in a receivership, insolvency, liquidation, or similar proceeding; (iii) The instrument has no maturity date, can be redeemed only at the discretion of the System institution and with the prior approval of FCA, and does not contain any term or feature that creates an incentive to redeem; (iv) The System institution did not create, through any action or communication, an expectation that it will buy back, cancel, redeem, or revolve the instrument, and the instrument does not include any term or feature that might give rise to such an expectation, except that the establishment of a revolvement period of 7 years or more, or the practice of redeeming or revolving the instrument no less than 7 years after issuance or allocation, will not be considered to create such an expectation; (v) Any cash dividend payments on the instrument are paid out of the System institution's net income or unallocated retained earnings, and are not subject to a limit imposed by the contractual terms governing the instrument; (vi) The System institution has full discretion at all times to refrain from paying any dividends without triggering an event of default, a requirement to make a payment-in-kind, or an imposition of any other restrictions on the System institution; (vii) Dividend payments and other distributions related to the instrument may be paid only after all legal and contractual obligations of the System institution have been satisfied, including payments due on more senior claims; (viii) The holders of the instrument bear losses as they occur before any losses are borne by holders of preferred stock claims on the System institution and holders of any other claims with priority over common cooperative equity instruments in a receivership, insolvency, liquidation, or similar proceeding; (ix) The instrument is classified as equity under GAAP; (x) The System institution, or an entity that the System institution controls, did not purchase or directly or indirectly fund the purchase of the instrument, except that where there is an obligation for a member of the institution to hold an instrument in order to receive a loan or service from the System institution, an amount of that loan equal to no more than $1,000 of the borrower stock requirement under section 4.3A of the Act will not be considered as a direct or indirect funding where: (A) The purpose of the loan is not the purchase of capital instruments of the System institution providing the loan; and (B) The purchase or acquisition of one or more member equities of the institution is necessary in order for the beneficiary of the loan to become a member of the System institution; (xi) The instrument is not secured, not covered by a guarantee of the System institution, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument; (xii) The instrument is issued in accordance with applicable laws and regulations and with the institution's capitalization bylaws; (xiii) The instrument is reported on the System institution's regulatory financial statements separately from other capital instruments; and (xiv) The System institution's capitalization bylaws, or a resolution adopted by its board of directors under § 628.21, provides that the institution: (A) Establishes a minimum redemption or revolvement period of 7 years for equities included in CET1; and (B) Shall not redeem, revolve, cancel, or remove any equities included in CET1 without prior approval of the FCA under paragraph (f) of this section, except that the statutory borrower stock described in paragraph (b)(1)(x) of this section, not to exceed $1,000, may be redeemed without a minimum period outstanding after issuance and without the prior approval of the FCA, as long as after the redemption, the System institution continues to comply with all minimum regulatory capital requirements. (2) Unallocated retained earnings. (3) Paid-in capital resulting from a merger of System institutions or repurchase of third-party capital. (4)-(5) [Reserved] (c) AT1 capital. (1) Instruments and related surplus, other than common cooperative equities, that meet the following criteria: (i) The instrument is issued and paid-in; (ii) The instrument is subordinated to general creditors and subordinated debt holders of the System institution in a receivership, insolvency, liquidation, or similar proceeding; (iii) The instrument is not secured, not covered by a guarantee of the System institution and not subject to any other arrangement that legally or economically enhances the seniority of the instrument; (iv) The instrument has no maturity date and does not contain a dividend step-up or any other term or feature that creates an incentive to redeem; (v) If callable by its terms, the instrument may be called by the System institution only after a minimum of 5 years following issuance, except that the terms of the instrument may allow it to be called earlier than 5 years upon the occurrence of a regulatory event that precludes the instrument from being included in AT1 capital, or a tax event. In addition: (A) The System institution must receive prior approval from FCA to exercise a call option on the instrument. (B) The System institution does not create at issuance of the instrument, through any action or communication, an expectation that the call option will be exercised. (C) Prior to exercising the call option, or immediately thereafter, the System institution must either replace the instrument to be called with an equal amount of instruments that meet the criteria under paragraph (b) of this section or this paragraph (c), 3 3 (vi) Redemption or repurchase of the instrument requires prior approval from FCA; (vii) The System institution has full discretion at all times to cancel dividends or other distributions on the instrument without triggering an event of default, a requirement to make a payment-in-kind, or an imposition of other restrictions on the System institution except in relation to any distributions to holders of common cooperative equity instruments or other instruments that are pari passu with the instrument; (viii) Any distributions on the instrument are paid out of the System institution's net income, unallocated retained earnings, or surplus related to other AT1 capital instruments; (ix) The instrument does not have a credit-sensitive feature, such as a dividend rate that is reset periodically based in whole or in part on the System institution's credit quality, but may have a dividend rate that is adjusted periodically independent of the System institution's credit quality, in relation to general market interest rates or similar adjustments; (x) The paid-in amount is classified as equity under GAAP; (xi) The System institution did not purchase or directly or indirectly fund the purchase of the instrument; (xii) The instrument does not have any features that would limit or discourage additional issuance of capital by the System institution, such as provisions that require the System institution to compensate holders of the instrument if a new instrument is issued at a lower price during a specified timeframe; and (xiii) [Reserved] (xiv) The System institution's capitalization bylaws, or a resolution adopted by its board of directors under § 628.21, provides that the institution: (A) Establishes a minimum redemption or no-call period of 5 years for equities included in additional tier 1; and (B) Shall not redeem, revolve, cancel, or remove any equities included in additional tier 1 capital without prior approval of the FCA under paragraph (f) of this section. (2)-(3) [Reserved] (4) Notwithstanding the criteria for AT1 capital instruments referenced in paragraph (c)(1) of this section: (i) [Reserved] (ii) An instrument with terms that provide that the instrument may be called earlier than 5 years upon the occurrence of a rating agency event does not violate the criterion in paragraph (c)(1)(v) of this section provided that the instrument was issued and included in a System institution's core surplus capital prior to January 1, 2017, and that such instrument satisfies all other criteria under this § 628.20(c). (d) Tier 2 Capital. (1) Instruments (plus related surplus) that meet the following criteria: (i) The instrument is issued and paid-in; (ii) The instrument is subordinated to general creditors of the System institution; (iii) The instrument is not secured, not covered by a guarantee of the System institution and not subject to any other arrangement that legally or economically enhances the seniority of the instrument in relation to more senior claims; (iv) The instrument has a minimum original maturity of at least 5 years. At the beginning of each of the last 5 years of the life of the instrument, the amount that is eligible to be included in tier 2 capital is reduced by 20 percent of the original amount of the instrument (net of redemptions) and is excluded from regulatory capital when the remaining maturity is less than 1 year. In addition, the instrument must not have any terms or features that require, or create significant incentives for, the System institution to redeem the instrument prior to maturity; 4 4 (v) The instrument, by its terms, may be called by the System institution only after a minimum of 5 years following issuance, except that the terms of the instrument may allow it to be called sooner upon the occurrence of an event that would preclude the instrument from being included in tier 2 capital, or a tax event. In addition: (A) The System institution must receive the prior approval of FCA to exercise a call option on the instrument. (B) The System institution does not create at issuance, through action or communication, an expectation the call option will be exercised. (C) Prior to exercising the call option, or immediately thereafter, the System institution must either: replace any amount called with an equivalent amount of an instrument that meets the criteria for regulatory capital under this section; 5 5 (vi) The holder of the instrument must have no contractual right to accelerate payment of principal, dividends, or interest on the instrument, except in the event of a receivership, insolvency, liquidation, or similar proceeding of the System institution; (vii) The instrument has no credit-sensitive feature, such as a dividend or interest rate that is reset periodically based in whole or in part on the System institution's credit standing, but may have a dividend rate that is adjusted periodically independent of the System institution's credit standing, in relation to general market interest rates or similar adjustments; (viii) The System institution has not purchased and has not directly or indirectly funded the purchase of the instrument, except that where common cooperative equity instruments are held by a member of the institution in connection with a loan, and the institution funds the acquisition of such instruments, that loan shall not be considered as a direct or indirect funding where: (A) The purpose of the loan is not the purchase of capital instruments of the System institution providing the loan; (B) The purchase or acquisition of one or more capital instruments of the institution is necessary in order for the beneficiary of the loan to become a member of the System institution; and (C) The capital instruments are in excess of $1,000. (ix) [Reserved] (x) Redemption of the instrument prior to maturity or repurchase is at the discretion of the System institution and requires the prior approval of the FCA; (xi) The System institution's capitalization bylaws, or a resolution adopted by its board of directors under § 628.21, provides that the institution: (A) Establishes a minimum call, redemption or revolvement period of 5 years for equities included in tier 2 capital; and (B) Shall not call, redeem, revolve, cancel, or remove any equities included in tier 2 capital without prior approval of the FCA under paragraph (f) of this section. (2) [Reserved] (3) AACL up to 1.25 percent of the System institution's total risk-weighted assets not including any amount of the AACL. (4)-(6) [Reserved] (e) FCA approval of a capital element. (i)-(ii) [Reserved] (2) [Reserved] (3) After determining that a regulatory capital element may be included in a System institution's CET1 capital, AT1 capital, or tier 2 capital, FCA will make its decision publicly available. (f) FCA prior approval of capital redemptions and dividends included in tier 1 and tier 2 capital. (2) At least 30 days prior to the intended action, the System institution must submit a request for approval to the FCA. The FCA's 30-day review period begins on the date on which the FCA receives the request. (3) The request is deemed to be granted if the FCA does not notify the System institution to the contrary before the end of the 30-day review period. (4)(i) A System institution may request advance approval to cover several anticipated cash dividend or patronage payments, or equity redemptions, provided that the institution projects sufficient current net income during those periods to support the amount of the cash dividend or patronage payments and equity redemptions. In determining whether to grant advance approval, the FCA will consider: (A) The reasonableness of the institution's request, including its historical and projected cash dividend and patronage payments and equity redemptions; (B) The institution's historical trends and current projections for capital growth through earnings retention; (C) The overall condition of the institution, with particular emphasis on current and projected capital adequacy as described in § 628.10(e); and (D) Any other information that the FCA deems pertinent to reviewing the institution's request. (ii) After considering these standards, the FCA may grant advance prior approval of an institution's request to pay cash dividends and patronage or to redeem or revolve equity. Notwithstanding any such approval, an institution may not declare a dividend or patronage payment or redeem or revolve equities if, after such declaration, redemption, or revolvement, the institution would not meet its regulatory capital requirements set forth in this part and part 615 of this chapter. (5) Subject to any capital distribution restrictions specified in § 628.11, a System institution is deemed to have FCA prior approval for revolvements and redemptions of common cooperative equities, for cash dividend payments on all equities, and for cash patronage payments on all cooperative equities, provided that: (i) For redemptions or revolvements of common cooperative equities included in CET1 capital or tier 2 capital, other than as provided in paragraph (f)(6) of this section, the institution issued or allocated such equities at least 7 years ago for CET1 capital and at least 5 years ago for tier 2 capital; (ii) After such cash payments have been declared and defined by resolution of the board, the dollar amount of the System institution's CET1 capital at quarter-end equals or exceeds the dollar amount of CET1 capital on the same quarter-end in the previous calendar year; and (iii) The System institution continues to comply with all regulatory capital requirements and supervisory or enforcement actions. (6) The following equities are eligible to be redeemed or revolved under paragraph (f)(5)(i) of this section in less than the applicable minimum required holding period (7 years for CET1 inclusion and 5 years for tier 2 inclusion), provided that the requirements of paragraphs (f)(5)(ii) and (iii) of this section are met: (i) Equities mandated to be redeemed or retired by a final order of a court of competent jurisdiction; (ii) Equities held by the estate of a deceased former borrower; and (iii) Equities that the institution is required to cancel under § 615.5290 of this chapter in connection with a restructuring under part 617 of this chapter. [81 FR 49779, July 28, 2016, as amended at 86 FR 54359, Oct. 1, 2021; 87 FR 27493, May 9, 2022] § 628.21 Capital bylaw or board resolution to include equities in tier 1 and tier 2 capital. In order to include otherwise eligible purchased and allocated equities in tier 1 capital and tier 2 capital, the System institution must adopt a capitalization bylaw, or its board of directors must adopt a binding resolution, which resolution must be acknowledged by the board on an annual basis in the capital adequacy plan described in § 615.5200, in which the institution undertakes the following, as applicable: (a) The institution shall obtain prior FCA approval under § 628.20(f) before: (1) Redeeming or revolving the equities included in common equity tier 1 (CET1) capital; (2) Redeeming or calling the equities included in additional tier 1 capital; and (3) Redeeming, revolving, or calling instruments included in tier 2 capital other than limited life preferred stock or subordinated debt on the maturity date. (b) The equities shall have a minimum redemption or revolvement period as follows: (1) 7 years for equities included in CET1 capital, except that the statutory borrower stock described in § 628.20(b)(1)(x) may be redeemed without a minimum holding period and that equities designated as unallocated retained earnings (URE) equivalents cannot be revolved without submitting a written request to the FCA for prior approval; (2) a minimum no-call, repurchase, or redemption period of 5 years for additional tier 1 capital; and (3) a minimum no-call, repurchase, redemption, or revolvement period of 5 years for tier 2 capital. (c) The institution shall submit to FCA a written request for prior approval before: (1) Redesignating URE equivalents as equities that the institution may exercise its discretion to redeem other than upon dissolution or liquidation; (2) Removing equities or other instruments from CET1, additional tier 1, or tier 2 capital other than through repurchase, cancellation, redemption or revolvement; and (3) Redesignating equities included in one component of regulatory capital (CET1 capital, additional tier 1 capital, or tier 2 capital) for inclusion in another component of regulatory capital. (d) The institution shall not exercise its discretion to revolve URE equivalents except upon dissolution or liquidation and shall not offset URE equivalents against a loan in default except as required under final order of a court of competent jurisdiction or if required under § 615.5290 in connection with a restructuring under part 617 of this chapter. (e) The minimum redemption and revolvement period (holding period) for purchased and allocated equities starts on the common cooperative equity issuance date, as defined in § 628.2. [86 FR 54359, Oct. 1, 2021] § 628.22 Regulatory capital adjustments and deductions. (a) Regulatory capital deductions from CET1 capital. (1) Goodwill, net of associated deferred tax liabilities (DTLs) in accordance with paragraph (e) of this section; (2) Intangible assets, other than mortgage servicing assets (MSAs), net of associated DTLs in accordance with paragraph (e) of this section; (3) Deferred tax assets (DTAs) that arise from net operating loss and tax credit carryforwards net of any related valuation allowances and net of DTLs in accordance with paragraph (e) of this section; (4) Any gain-on-sale in connection with a securitization exposure; (5) Any defined benefit pension fund net asset, net of any associated DTL in accordance with paragraph (e) of this section, except that, with FCA prior approval, this deduction is not required for any defined benefit pension fund net asset to the extent the institution has unrestricted and unfettered access to the assets in that fund; (6) The System institution's allocated equity investment in another System institution or service corporation; and (7) [Reserved] (8) If, without the required prior FCA approval, the System institution redeems or revolves purchased or allocated equities included in its CET1 capital that have been outstanding for less than 7 years, the FCA may take appropriate supervisory or enforcement actions against the institution, which may include requiring the institution to deduct a portion of its purchased and allocated equities from CET1 capital. (b) Regulatory adjustments to CET1 capital. (2) [Reserved] (c) Deductions from regulatory capital 6 6 (2) Corresponding deduction approach (i)-(iii) [Reserved] (3)-(4) [Reserved] (5) Purchased equity investments in another System institution. (d) [Reserved] (e) Netting of DTLs against assets subject to deduction. (i) The DTL is associated with the asset; and (ii) The DTL would be extinguished if the associated asset becomes impaired or is derecognized under GAAP. (2) A DTL may only be netted against a single asset. (3)-(4) [Reserved] (5) A System institution must net DTLs against assets subject to deduction under this section in a consistent manner from reporting period to reporting period. (f) Insufficient amounts of a specific regulatory capital component to effect deductions. (g) Treatment of assets that are deducted. (h) [Reserved] [81 FR 49779, July 28, 2016, as amended at 86 FR 54360, Oct. 1, 2021; 87 FR 27493, May 9, 2022] § 628.23 Limit on inclusion of third-party capital in total (tier 1 and tier 2) capital. The combined amount of third-party capital instruments that a System institution may include in total (tier 1 and tier 2) capital is equal to the greater of the following: (a) The then existing limit, if any; or (b) The lesser of: (1) Forty percent of total capital, calculated by taking two thirds of the average of the previous 4 quarters of total capital reported on the institution's Call Report filed with the FCA, less any amounts of third-party capital reported in total capital; or (2) The average of the previous 4 quarters of CET1 capital reported on its Call Report filed with the FCA. (c) Treatment of assets that are deducted §§ 628.24-628.29 [Reserved] Subpart D—Risk-Weighted Assets—Standardized Approach § 628.30 Applicability. (a) This subpart sets forth methodologies for determining risk-weighted assets for purposes of the generally applicable risk-based capital requirements for all System institutions. (b) [Reserved] Risk-Weighted Assets for General Credit Risk § 628.31 Mechanics for calculating risk-weighted assets for general credit risk. (a) General risk-weighting requirements. (1) A System institution must determine the exposure amount of each on-balance sheet exposure, each OTC derivative contract, and each off-balance sheet commitment, trade and transaction-related contingency, guarantee, repo-style transaction, financial standby letter of credit, forward agreement, or other similar transaction that is not: (i) An unsettled transaction subject to § 628.38; (ii) A cleared transaction subject to § 628.35; (iii) [Reserved] (iv) A securitization exposure subject to §§ 628.41 through 628.45; or (v) An equity exposure (other than an equity OTC derivative contract) subject to §§ 628.51 through 628.53. (2) The System institution must multiply each exposure amount by the risk weight appropriate to the exposure based on the exposure type or counterparty, eligible guarantor, or financial collateral to determine the risk-weighted asset amount for each exposure. (b) Total risk-weighted assets for general credit risk equals the sum of the risk-weighted asset amounts calculated under this section. § 628.32 General risk weights. (a) Sovereign exposures Exposures to the U.S. Government. (A) An exposure to the U.S. Government, its central bank, or a U.S. Government agency; and (B) The portion of an exposure that is directly and unconditionally guaranteed by the U.S. Government, its central bank, or a U.S. Government agency. This includes a deposit or other exposure, or the portion of a deposit or other exposure that is insured or otherwise unconditionally guaranteed by the Federal Deposit Insurance Corporation or National Credit Union Administration. (ii) A System institution must assign a 20-percent risk weight to the portion of an exposure that is conditionally guaranteed by the U.S. Government, its central bank, or a U.S. Government agency. This includes an exposure, or the portion of an exposure, that is conditionally guaranteed by the Federal Deposit Insurance Corporation or National Credit Union Administration. (2) Other sovereign exposures. Table 1 to § 628.32—Risk Weights for Sovereign Exposures Risk weight CRC: 0-1 0 2 20 3 50 4-6 100 7 150 OECD Member with no CRC 0 Non-OECD Member with no CRC 100 Sovereign Default 150 (3) Certain sovereign exposures. (i) The exposure is denominated in the sovereign's currency; (ii) The System institution has at least an equivalent amount of liabilities in that currency; and (iii) The risk weight is not lower than the risk weight that the sovereign allows banking organizations under its jurisdiction to assign to the same exposures to the sovereign. (4) Exposures to a non-OECD member sovereign with no CRC. (5) Exposures to an OECD member sovereign with no CRC. (6) Sovereign default. (b) Certain supranational entities and multilateral development banks (MDBs). (c) Exposures to Government-sponsored enterprises (GSEs). (2) A System institution must assign a 100-percent risk weight to preferred stock issued by a non-System GSE. (3) Purchased equity investments (including preferred stock investments) in other System institutions do not receive a risk weight, because they are deducted from capital in accordance with § 628.22. (d) Exposures to depository institutions, foreign banks, and credit unions Exposures to U.S. depository institutions and credit unions. (2) Exposures to foreign banks. Table 2 to § 628.32—Risk Weights for Exposures to Foreign Banks Risk weight CRC: 0-1 20 2 50 3 100 4-7 150 OECD Member with No CRC 20 Non-OECD with No CRC 100 Sovereign Default 150 (ii) A System institution must assign a 20-percent risk weight to an exposure to a foreign bank whose home country is a member of the OECD and does not have a CRC. (iii) A System institution must assign a 100-percent risk weight to an exposure to a foreign bank whose home country is not a member of the OECD and does not have a CRC, with the exception of self-liquidating, trade-related contingent items that arise from the movement of goods, and that have a maturity of 3 months or less, which may be assigned a 20-percent risk weight. (iv) A System institution must assign a 150-percent risk weight to an exposure to a foreign bank immediately upon determining that an event of sovereign default has occurred in the bank's home country, or if an event of sovereign default has occurred in the foreign bank's home country during the previous 5 years. (3) [Reserved] (e) Exposures to public sector entities (PSEs) Exposures to U.S. PSEs. (ii) A System institution must assign a 50-percent risk weight to a revenue obligation exposure to a PSE that is organized under the laws of the United States or any state or political subdivision thereof. (2) Exposures to foreign PSEs. (ii) Except as provided in paragraphs (e)(1) and (3) of this section, a System institution must assign a risk weight to a revenue obligation exposure to a foreign PSE, in accordance with Table 4 to § 628.32, based on the CRC that corresponds to the PSE's home country; or the OECD membership status of the PSE's home country if there is no CRC applicable to the PSE's home country. (3) A System institution may assign a lower risk weight than would otherwise apply under tables 3 and 4 to § 628.32 to an exposure to a foreign PSE if: (i) The PSE's home country supervisor allows banks under its jurisdiction to assign a lower risk weight to such exposures; and (ii) The risk weight is not lower than the risk weight that corresponds to the PSE's home country in accordance with table 1 to § 628.32. Table 3 to § 628.32—Risk Weights for Non-U.S. PSE General Obligations Risk weight CRC: 0-1 20 2 50 3 100 4-7 150 OECD Member with No CRC 20 Non-OECD Member with No CRC 100 Sovereign Default 150 Table 4 to § 628.32—Risk Weights for Non-U.S. PSE Revenue Obligations Risk weight CRC: 0-1 50 2-3 100 4-7 150 OECD Member with No CRC 50 Non-OECD Member with No CRC 100 Sovereign Default 150 (4) Exposures to PSEs from an OECD member sovereign with no CRC. (ii) A System institution must assign a 50-percent risk weight to a revenue obligation exposure to a PSE whose country is an OECD member sovereign with no CRC. (5) Exposures to PSEs whose home country is not an OECD member sovereign with no CRC. (6) A System institution must assign a 150-percent risk weight to a PSE exposure immediately upon determining that an event of sovereign default has occurred in a PSE's home country or if an event of sovereign default has occurred in the PSE's home country during the previous 5 years. (f) Corporate exposures 100-percent risk weight. (i) Borrower loans such as agricultural loans and consumer loans, regardless of the corporate form of the borrower, unless those loans qualify for different risk weights under other provisions of this subpart D; (ii) System bank exposures to OFIs that do not satisfy the requirements for a 20-percent risk weight pursuant to paragraph (d)(1) of this section or a 50-percent risk weight pursuant to paragraph (f)(2) of this section; and (iii) Premises, fixed assets, and other real estate owned. (2) 50-percent risk weight. (i) The OFI is investment grade or is owned and controlled by an investment grade entity that guarantees the exposure; or (ii) The OFI meets capital, risk identification and control, and operational standards similar to the OFIs identified in paragraph (d)(1) of this section. (g) Residential mortgage exposures. (i) Is secured by a property that is either owner-occupied or rented; (ii) Is made in accordance with prudent underwriting standards suitable for residential property, including standards relating to the loan amount as a percent of the appraised value of the property; (iii) Is not 90 days or more past due or carried in nonaccrual status; and (iv) Is not restructured or modified. (2) A System institution must assign a 100-percent risk weight to a first-lien residential mortgage exposure that does not meet the criteria in paragraph (g)(1) of this section, and to junior-lien residential mortgage exposures. (3) For the purpose of this paragraph (g), if a System institution holds the first-lien and junior-lien(s) residential mortgage exposures, and no other party holds an intervening lien, the System institution must combine the exposures and treat them as a single first-lien residential mortgage exposure. (4) A loan modified or restructured solely pursuant to the U.S. Treasury's Home Affordable Mortgage Program is not modified or restructured for purposes of this section. (h)-(i) [Reserved] (j) High volatility commercial real estate (HVCRE) exposures. (k) Past due and nonaccrual exposures. (1) A System institution must assign a 150-percent risk weight to the portion of the exposure that is not guaranteed or that is not secured by financial collateral. (2) A System institution may assign a risk weight to the guaranteed portion of a past due or nonaccrual exposure based on the risk weight that applies under § 628.36 if the guarantee or credit derivative meets the requirements of that section. (3) A System institution may assign a risk weight to the portion of a past due or nonaccrual exposure that is collateralized by financial collateral based on the risk weight that applies under § 628.37 if the financial collateral meets the requirements of that section. (l) Other assets. (2) A System institution must assign a 20-percent risk weight to cash items in the process of collection. (3) A System institution must assign a 100-percent risk weight to deferred tax assets (DTAs) arising from temporary differences in relation to net operating loss carrybacks. (4) A System institution must assign a 100-percent risk weight to all MSAs. (5) A System institution must assign a 100-percent risk weight to all assets that are not specifically assigned a different risk weight under this subpart and that are not deducted from tier 1 or tier 2 capital pursuant to § 628.22. (6) [Reserved] [81 FR 49779, July 28, 2016, as amended at 86 FR 54360, Oct. 1, 2021; 89 FR 25130, Apr. 10, 2024] § 628.33 Off-balance sheet exposures. (a) General. (2) Where a System institution commits to provide a commitment, the System institution may apply the lower of the two applicable CCFs. (3) Where a System institution provides a commitment structured as a syndication or participation, the System institution is only required to calculate the exposure amount for its pro rata share of the commitment. (4) Where a System institution provides a commitment, enters into a repurchase agreement, or provides a credit enhancing representation and warranty, and such commitment, repurchase agreement, or credit-enhancing representation and warranty is not a securitization exposure, the exposure amount shall be no greater than the maximum contractual amount of the commitment, repurchase agreement, or credit-enhancing representation and warranty, as applicable. (5) The exposure amount of a System bank's commitment to an association or OFI is the difference between the association's or OFI's maximum credit limit with the System bank (as established by the general financing agreement or promissory note, as required by § 614.4125(d) of this chapter), and the amount the association or OFI has borrowed from the System bank. (b) Credit conversion factors Zero-percent (0%) CCF. (2) Twenty-percent (20%) CCF. (i) Commitments, other than a System bank's commitment to an association or OFI, with an original maturity of 14 months or less that are not unconditionally cancelable by the System institution. (ii) Self-liquidating, trade-related contingent items that arise from the movement of goods, with an original maturity of 14 months or less. (iii) A System bank's commitment to an association or OFI that is not unconditionally cancelable by the System bank, regardless of maturity. (3) Fifty-percent (50%) CCF. (i) Commitments, other than a System bank's commitment to an association or OFI, with an original maturity of more than 14 months that are not unconditionally cancelable by the System institution. (ii) Transaction-related contingent items, including performance bonds, bid bonds, warranties, and performance standby letters of credit. (4) One hundred-percent (100%) CCF. (i) Guarantees; (ii) Repurchase agreements (the off-balance sheet component of which equals the sum of the current fair values of all positions the System institution has sold subject to repurchase); (iii) Credit-enhancing representations and warranties that are not securitization exposures; (iv) Off-balance sheet securities lending transactions (the off-balance sheet component of which equals the sum of the current fair values of all positions the System institution has lent under the transaction); (v) Off-balance sheet securities borrowing transactions (the off-balance sheet component of which equals the sum of the current fair values of all non-cash positions the System institution has posted as collateral under the transaction); (vi) Financial standby letters of credit; and (vii) Forward agreements. § 628.34 OTC derivative contracts. (a) Exposure amount Single OTC derivative contract. (i) Current credit exposure. (ii) PFE. (B) For purposes of calculating either the PFE under this paragraph or the gross PFE under paragraph (a)(2) of this section for exchange rate contracts and other similar contracts in which the notional principal amount is equivalent to the cash flows, notional principal amount is the net receipts to each party falling due on each value date in each currency. (C) For an OTC derivative contract that does not fall within one of the specified categories in Table 1 to § 628.34, the PFE must be calculated using the appropriate “other” conversion factor. (D) A System institution must use an OTC derivative contract's effective notional principal amount (that is, the apparent or stated notional principal amount multiplied by any multiplier in the OTC derivative contract) rather than the apparent or stated notional principal amount in calculating PFE. (E) The PFE of the protection provider of a credit derivative is capped at the net present value of the amount of unpaid premiums. Table 1 to § 628.34—Conversion Factor Matrix for Derivative Contracts 1 Remaining maturity 2 Interest rate Foreign Credit (investment grade reference asset) 3 Credit (non- investment- grade reference asset) Equity Precious Other One (1) year or less 0.00 0.01 0.05 0.10 0.06 0.07 0.10 Greater than one (1) year and less than or equal to five (5) years 0.005 0.05 0.05 0.10 0.08 0.07 0.12 Greater than five (5) years 0.015 0.075 0.05 0.10 0.10 0.08 0.15 1 2 3 (2) Multiple OTC derivative contracts subject to a qualifying master netting agreement. (i) Net current credit exposure. (ii) Adjusted sum of the PFE amounts. A net gross gross Where: A gross Net-to-gross Ratio (NGR) = the ratio of the net current credit exposure to the gross current credit exposure. In calculating the NGR, the gross current credit exposure equals the sum of the positive current credit exposures (as determined under paragraph (a)(1)(i) of this section) of all individual derivative contracts subject to the qualifying master netting agreement. (b) Recognition of credit risk mitigation of collateralized OTC derivative contracts. (2) Alternatively, if the financial collateral securing a contract or netting set described in paragraph (b)(1) of this section is marked-to-fair value on a daily basis and subject to a daily margin maintenance requirement, a System institution may recognize the credit risk mitigation benefits of financial collateral that secures the contract or netting set by using the collateral haircut approach in § 628.37(c). (c) Counterparty credit risk for OTC credit derivatives Protection purchasers. (2) Protection providers. (ii) The provisions of paragraph (c)(2) of this section apply to all relevant counterparties for risk-based capital purposes. (d) Counterparty credit risk for OTC equity derivatives. (2) [Reserved] (3) If the System institution risk weights the contract under the Simple Risk-Weight Approach (SRWA) in § 628.52, the System institution may choose not to hold risk-based capital against the counterparty credit risk of the OTC equity derivative contract, as long as it does so for all such contracts. Where the OTC equity derivative contracts are subject to a qualifying master netting agreement, a System institution using the SRWA must either include all or exclude all of the contracts from any measure used to determine counterparty credit risk exposure. (e) [Reserved] § 628.35 Cleared transactions. (a) General requirements Clearing member clients. (2) [Reserved] (b) Clearing member client System institutions Risk-weighted assets for cleared transactions. (ii) A clearing member client System institution's total risk-weighted assets for cleared transactions is the sum of the risk-weighted asset amounts for all its cleared transactions. (2) Trade exposure amount. (A) The exposure amount for the derivative contract or netting set of derivative contracts, calculated using the current exposure method (CEM) for OTC derivative contracts under § 628.34; plus (B) The fair value of the collateral posted by the clearing member client System institution and held by the central counterparty (CCP), clearing member, or custodian in a manner that is not bankruptcy remote. (ii) For a cleared transaction that is a repo-style transaction, the trade exposure amount equals: (A) The exposure amount for the repo-style transaction calculated using the collateral haircut methodology under § 628.37(c); plus (B) The fair value of the collateral posted by the clearing member client System institution and held by the CCP or a clearing member in a manner that is not bankruptcy remote. (3) Cleared transaction risk weights. (A) Two (2) percent if the collateral posted by the System institution to the QCCP or clearing member is subject to an arrangement that prevents any losses to the clearing member client System institution due to the joint default or a concurrent insolvency, liquidation, or receivership proceeding of the clearing member and any other clearing member clients of the clearing member; and the clearing member client System institution has conducted sufficient legal review to conclude with a well-founded basis (and maintains sufficient written documentation of that legal review) that in the event of a legal challenge (including one resulting from default or from liquidation, insolvency, or receivership proceeding) the relevant court and administrative authorities would find the arrangements to be legal, valid, binding and enforceable under the law of the relevant jurisdictions; or (B) Four (4) percent if the requirements of paragraph (b)(3)(i)(A) of this section are not met. (ii) For a cleared transaction with a CCP that is not a QCCP, a clearing member client System institution must apply the risk weight appropriate for the CCP according to § 628.32. (4) Collateral. (ii) A clearing member client System institution must calculate a risk-weighted asset amount for any collateral provided to a CCP, clearing member, or custodian in connection with a cleared transaction in accordance with the requirements under § 628.32. (c)-(d) [Reserved] § 628.36 Guarantees and credit derivatives: Substitution treatment. (a) Scope General. (2) This section applies to exposures for which: (i) Credit risk is fully covered by an eligible guarantee or eligible credit derivative; or (ii) Credit risk is covered on a pro rata basis (that is, on a basis in which the System institution and the protection provider share losses proportionately) by an eligible guarantee or eligible credit derivative. (3) Exposures on which there is a tranching of credit risk (reflecting at least two different levels of seniority) generally are securitization exposures subject to §§ 628.41 through 628.45. (4) If multiple eligible guarantees or eligible credit derivatives cover a single exposure described in this section, a System institution may treat the hedged exposure as multiple separate exposures each covered by a single eligible guarantee or eligible credit derivative and may calculate a separate risk-weighted asset amount for each separate exposure as described in paragraph (c) of this section. (5) If a single eligible guarantee or eligible credit derivative covers multiple hedged exposures described in paragraph (a)(2) of this section, a System institution must treat each hedged exposure as covered by a separate eligible guarantee or eligible credit derivative and must calculate a separate risk-weighted asset amount for each exposure as described in paragraph (c) of this section. (b) Rules of recognition. (2) A System institution may only recognize the credit risk mitigation benefits of an eligible credit derivative to hedge an exposure that is different from the credit derivative's reference exposure used for determining the derivative's cash settlement value, deliverable obligation, or occurrence of a credit event if: (i) The reference exposure ranks pari passu (ii) The reference exposure and the hedged exposure are to the same legal entity, and legally enforceable cross-default or cross-acceleration clauses are in place to ensure payments under the credit derivative are triggered when the obligated party of the hedged exposure fails to pay under the terms of the hedged exposure. (c) Substitution approach Full coverage. (2) Partial coverage. (i) The System institution may calculate the risk-weighted asset amount for the protected exposure under § 628.32, where the applicable risk weight is the risk weight applicable to the guarantor or credit derivative protection provider. (ii) The System institution must calculate the risk-weighted asset amount for the unprotected exposure under § 628.32, where the applicable risk weight is that of the unprotected portion of the hedged exposure. (iii) The treatment provided in this section is applicable when the credit risk of an exposure is covered on a partial pro rata basis and may be applicable when an adjustment is made to the effective notional amount of the guarantee or credit derivative under paragraph (d), (e), or (f) of this section. (d) Maturity mismatch adjustment. (2) A maturity mismatch occurs when the residual maturity of a credit risk mitigant is less than that of the hedged exposure(s). (3) The residual maturity of a hedged exposure is the longest possible remaining time before the obligated party of the hedged exposure is scheduled to fulfill its obligation on the hedged exposure. If a credit risk mitigant has embedded options that may reduce its term, the System institution (protection purchaser) must use the shortest possible residual maturity for the credit risk mitigant. If a call is at the discretion of the protection provider, the residual maturity of the credit risk mitigant is at the first call date. If the call is at the discretion of the System institution (protection purchaser), but the terms of the arrangement at origination of the credit risk mitigant contain a positive incentive for the System institution to call the transaction before contractual maturity, the remaining time to the first call date is the residual maturity of the credit risk mitigant. (4) A credit risk mitigant with a maturity mismatch may be recognized only if its original maturity is greater than or equal to 1 year and its residual maturity is greater than 3 months. (5) When a maturity mismatch exists, the System institution must apply the following adjustment to reduce the effective notional amount of the credit risk mitigant: P m = E x [(t−0.25)/(T−0.25)] Where: P m E t T (e) Adjustment for credit derivatives without restructuring as a credit event. P r m Where: P r P m (f) Currency mismatch adjustment. P c P r 1-H fx Where: P c P r H fx (2) A System institution must set H fx (3) A System institution must adjust H fx Where T M § 628.37 Collateralized transactions. (a) General. (i) The simple approach in paragraph (b) of this section for any exposure. (ii) The collateral haircut approach in paragraph (c) of this section for repo-style transactions, eligible margin loans, collateralized derivative contracts, and single-product netting sets of such transactions. (2) A System institution may use any approach described in this section that is valid for a particular type of exposure or transaction; however, it must use the same approach for similar exposures or transactions. (b) The simple approach General requirements. (ii) To qualify for the simple approach, the financial collateral must meet the following requirements: (A) The collateral must be subject to a collateral agreement for at least the life of the exposure; (B) The collateral must be revalued at least every 6 months; and (C) The collateral (other than gold) and the exposure must be denominated in the same currency. (2) Risk-weight substitution. (ii) A System institution must apply a risk weight to the unsecured portion of the exposure based on the risk weight assigned to the exposure under this subpart. (3) Exceptions to the 20-percent risk-weight floor and other requirements. (i) A System institution may assign a 0-percent risk weight to an exposure to an OTC derivative contract that is marked-to-fair on a daily basis and subject to a daily margin maintenance requirement, to the extent the contract is collateralized by cash on deposit. (ii) A System institution may assign a 10-percent risk weight to an exposure to an OTC derivative contract that is marked-to-fair value daily and subject to a daily margin maintenance requirement, to the extent that the contract is collateralized by an exposure to a sovereign that qualifies for a 0-percent risk weight under § 628.32. (iii) A System institution may assign a 0-percent risk weight to the collateralized portion of an exposure where: (A) The financial collateral is cash on deposit; or (B) The financial collateral is an exposure to a sovereign that qualifies for a 0-percent risk weight under § 628.32, and the System institution has discounted the fair value of the collateral by 20 percent. (c) Collateral haircut approach General. (2) Exposure amount equation. { 0, [(∑E—∑C) + ∑(E s x H s ) + ∑(E fx x H fx Where: ∑E ∑E ∑C E s H s E fx H fx fx (3) Standard supervisory haircuts. Table 1 to § 628.37—Standard Supervisory Market Price Volatility Haircut 1 Residual maturity Haircut (in percent) assigned based on Investment grade securitization exposures Sovereign issuers risk weight under § 628.32 2 Non-sovereign issuers risk weight under § 628.32 Zero 20% or −50% 100% 20% 50% 100% Less than or equal to 1 year 0.5 1.0 15.0 1.0 2.0 25.0 4.0% Great than 1 years and less than and equal to 5 years 2.0 3.0 15.0 4.0 6.0 25.0 12.0% Greater than 5 years 4.0 6.0 15.0 8.0 12.0 25.0 24.0% Main index equities (including convertible bonds) and gold 15.0% Other publically traded equities (including convertible bonds) 25.0% Mutual funds Highest haircut applicable to any security in which the fund can invest Cash collateral 0% 1 2 (ii) For currency mismatches, a System institution must use a haircut for foreign exchange rate volatility (H fx (iii) For repo-style transactions, a System institution may multiply the standard supervisory haircuts provided in paragraphs (c)(3)(i) and (ii) of this section by the square root of 1/2 (iv) If the number of trades in a netting set exceeds 5,000 at any time during a quarter, a System institution must adjust the supervisory haircuts provided in paragraphs (c)(3)(i) and (ii) of this section upward on the basis of a holding period of 20 business days for the following quarter except in the calculation of the exposure amount for purposes of § 628.35. If a netting set contains one or more trades involving illiquid collateral or an OTC derivative that cannot be easily replaced, a System institution must adjust the supervisory haircuts upward on the basis of a holding period of 20 business days. If over the 2 previous quarters more than two margin disputes on a netting set have occurred that lasted more than the holding period, then the System institution must adjust the supervisory haircuts upward for that netting set on the basis of a holding period that is at least two times the minimum holding period for that netting set. A System institution must adjust the standard supervisory haircuts upward using the following formula: Where: T M H S T S (v) If the instrument a System institution has lent, sold subject to repurchase, or posted as collateral does not meet the definition of financial collateral in § 628.2, the System institution must use a 25-percent haircut for fair value price volatility ( H S (4) [Reserved] Risk-Weighted Assets for Unsettled Transactions § 628.38 Unsettled transactions. (a) Definitions. (1) Delivery-versus-payment (DvP) transaction means a securities or commodities transaction in which the buyer is obligated to make payment only if the seller has made delivery of the securities or commodities and the seller is obligated to deliver the securities or commodities only if the buyer has made payment. (2) Payment-versus-payment (PvP) transaction means a foreign exchange transaction in which each counterparty is obligated to make a final transfer of one or more currencies only if the other counterparty has made a final transfer of one or more currencies. (3) A transaction has a normal settlement period if the contractual settlement period for the transaction is equal to or less than the fair value standard for the instrument underlying the transaction and equal to or less than 5 business days. (4) Positive current exposure of a System institution for a transaction is the difference between the transaction value at the agreed settlement price and the current fair value price of the transaction, if the difference results in a credit exposure of the System institution to the counterparty. (b) Scope. (1) Cleared transactions that are marked-to-fair value daily and subject to daily receipt and payment of variation margin; (2) Repo-style transactions, including unsettled repo-style transactions; (3) One-way cash payments on OTC derivative contracts; or (4) Transactions with a contractual settlement period that is longer than the normal settlement period (which are treated as OTC derivative contracts as provided in § 628.34). (c) System-wide failures. (d) Delivery-versus-payment (DvP) and payment-versus-payment (PvP) transactions. Table 1 to § 628.38—Risk Weights for Unsettled DVP and PVP Transactions Number of business days after contractual settlement date Risk weight to be applied to positive current exposure From 5 to 15 100.0 From 16 to 30 625.0 From 31 to 45 937.5 46 or more 1,250.0 (e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-versus-payment) transactions. (2) From the business day after the System institution has made its delivery until 5 business days after the counterparty delivery is due, the System institution must calculate the risk-weighted asset amount for the transaction by treating the current fair value of the deliverables owed to the System institution as an exposure to the counterparty and using the applicable counterparty risk weight under § 628.32. (3) If the System institution has not received its deliverables by the 5th business day after counterparty delivery was due, the System institution must assign a 1,250-percent risk weight to the current fair value of the deliverables owed to the System institution. (f) Total risk-weighted assets for unsettled transactions. §§ 628.39-628.40 [Reserved] Risk-Weighted Assets for Securitization Exposures § 628.41 Operational requirements for securitization exposures. (a) Operational criteria for traditional securitizations. (1) The exposures are not reported on the System institution's consolidated balance sheet under GAAP; (2) The System institution has transferred to one or more third parties credit risk associated with the underlying exposures; (3) Any clean-up calls relating to the securitization are eligible clean-up calls; and (4) The securitization does not: (i) Include one or more underlying exposures in which the borrower is permitted to vary the drawn amount within an agreed limit under a line of credit; and (ii) Contain an early amortization provision. (b) Operational criteria for synthetic securitizations. (1) The credit risk mitigant is: (i) Financial collateral; (ii) A guarantee that meets all criteria set forth in the definition of “eligible guarantee” in § 628.2, except for the criteria in paragraph (3) of that definition; or (iii) A credit derivative that meets all criteria as set forth in the definition of “eligible credit derivative” in § 628.2, except for the criteria in paragraph (3) of the definition of “eligible guarantee” in § 628.2. (2) The System institution transfers credit risk associated with the underlying exposures to one or more third parties, and the terms and conditions in the credit risk mitigants employed do not include provisions that: (i) Allow for the termination of the credit protection due to deterioration in the credit quality of the underlying exposures; (ii) Require the System institution to alter or replace the underlying exposures to improve the credit quality of the pool of underlying exposures; (iii) Increase the System institution's cost of credit protection in response to deterioration in the credit quality of the underlying exposures; (iv) Increase the yield payable to parties other than the System institution in response to a deterioration in the credit quality of the underlying exposures; or (v) Provide for increases in a retained first loss position or credit enhancement provided by the System institution after the inception of the securitization; (3) The System institution obtains a well-reasoned opinion from legal counsel that confirms the enforceability of the credit risk mitigant in all relevant jurisdictions; and (4) Any clean-up calls relating to the securitization are eligible clean-up calls. (c) Due diligence requirements. (2) A System institution must demonstrate its comprehensive understanding of a securitization exposure under paragraph (c)(1) of this section for each securitization exposure by: (i) Conducting an analysis of the risk characteristics of a securitization exposure prior to acquiring the exposure, and documenting such analysis within 3 business days after acquiring the exposure, considering: (A) Structural features of the securitization that would materially impact the performance of the exposure, for example, the contractual cash flow waterfall, waterfall-related triggers, credit enhancements, liquidity enhancements, fair value triggers, the performance of organizations that service the exposure, and deal-specific definitions of default; (B) Relevant information regarding the performance of the underlying credit exposure(s), for example, the percentage of loans 30, 60, and 90 days past due; default rates; prepayment rates; loans in foreclosure; property types; occupancy; average credit score or other measures of creditworthiness; average loan-to-value (LTV) ratio; and industry and geographic diversification data on the underlying exposure(s); (C) Relevant market data of the securitization, for example, bid-ask spread, most recent sales price and historic price volatility, trading volume, implied market rating, and size, depth and concentration level of the market for the securitization; and (D) For resecuritization exposures, performance information on the underlying securitization exposures, for example, the issuer name and credit quality, and the characteristics and performance of the exposures; and (ii) On an on-going basis (no less frequently than quarterly), evaluating, reviewing, and updating as appropriate the analysis required under paragraph (c)(1) of this section for each securitization exposure. § 628.42 Risk-weighted assets for securitization exposures. (a) Securitization risk weight approaches. (1) A System institution must deduct from CET1 capital any after-tax gain-on-sale resulting from a securitization (as provided in § 628.22) and must apply a 1,250-percent risk weight to the portion of a credit-enhancing interest-only strip (CEIO) that does not constitute after-tax gain-on-sale. (2) If a securitization exposure does not require deduction under paragraph (a)(1) of this section, a System institution may assign a risk weight to the securitization exposure using the simplified supervisory formula approach (SSFA) in accordance with § 628.43(a) through (d) and subject to the limitation under paragraph (e) of this section. Alternatively, a System institution may assign a risk weight to the purchased securitization exposure using the gross-up approach in accordance with § 628.43(e), provided however, that such System institution must apply either the SSFA or the gross-up approach consistently across all of its securitization exposures, except as provided in paragraphs (a)(1), (3), and (4) of this section. (3) If a securitization exposure does not require deduction under paragraph (a)(1) of this section and the System institution cannot or chooses not to apply the SSFA or the gross-up approach to the exposure, the System institution must assign a risk weight to the exposure as described in § 628.44. (4) If a securitization exposure is a derivative contract (other than protection provided by a System institution in the form of a credit derivative) that has a first priority claim on the cash flows from the underlying exposures (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments), a System institution may choose to set the risk-weighted asset amount of the exposure equal to the amount of the exposure as determined in paragraph (c) of this section. (b) Total risk-weighted assets for securitization exposures. (c) Exposure amount of a securitization exposure. (2) On-balance sheet securitization exposures (available-for-sale or held-to-maturity securities). (3) Off-balance sheet securitization exposures. (ii)-(iii) [Reserved] (4) Repo-style transactions, eligible margin loans, and derivative contracts. (d) Overlapping exposures. (e) Implicit support. (1) The System institution must include in risk-weighted assets all of the underlying exposures associated with the securitization as if the exposures had not been securitized and must deduct from CET1 capital (pursuant to § 628.22) any after-tax gain-on-sale resulting from the securitization; and (2) The System institution must disclose publicly: (i) That it has provided implicit support to the securitization; and (ii) The risk-based capital impact to the System institution of providing such implicit support. (f) Undrawn portion of an eligible servicer cash advance facility. (2) For a System institution that acts as a servicer, the exposure amount for a servicer cash advance facility that is not an eligible cash advance facility is equal to the amount of all potential future cash payments that the System institution may be contractually required to provide during the subsequent 12-month period under the governing facility. (g) Interest-only mortgage-backed securities. (h) Small-business loans and leases on personal property transferred with retained contractual exposure. (i) The transaction must be treated as a sale under GAAP. (ii) The System institution establishes and maintains, pursuant to GAAP, a non-capital reserve sufficient to meet the System institution's reasonably estimated liability under the contractual obligation. (iii) The small business obligations are to businesses that meet the criteria for a small-business concern established by the Small Business Administration under section 3(a) of the Small Business Act. (iv) [Reserved] (2) The total outstanding amount of contractual exposure retained by a System institution on transfers of small-business obligations receiving the capital treatment specified in paragraph (h)(1) of this section cannot exceed 15 percent of the System institution's total capital. (3) If a System institution exceeds the 15-percent capital limitation provided in paragraph (h)(2) of this section, the capital treatment under paragraph (h)(1) of this section will continue to apply to any transfers of small-business obligations with retained contractual exposure that occurred during the time that the System institution did not exceed the capital limit. (4) [Reserved] (i)-(ii) [Reserved] (i) N th -to-default credit derivatives Protection provider. (2)-(3) [Reserved] (4) Protection purchaser First-to-default credit derivatives. (ii) Second-or-subsequent-to-default credit derivatives. ( 1 ( 2 (B) If a System institution satisfies the requirements of paragraph (i)(4)(ii)(A) of this section, the System institution must determine its risk-based capital requirement for the underlying exposures as if the System institution had only synthetically securitized the underlying exposure with the nth smallest risk-weighted asset amount and had obtained no credit risk mitigant on the underlying exposures. (C) A System institution must calculate a risk-based capital requirement for counterparty credit risk according to § 628.34 for a nth-to-default credit derivative that does not meet the rules of recognition of § 628.36(b). (j) Guarantees and credit derivatives other than nth-to-default credit derivatives Protection provider. (2) Protection purchaser. (ii) If a System institution cannot, or chooses not to, recognize a purchased credit derivative as a credit risk mitigant under § 628.45, the System institution must determine the exposure amount of the credit derivative under § 628.34. (A) If the System institution purchases credit protection from a counterparty that is not a securitization special purpose entity (SPE), the System institution must determine the risk weight for the exposure according to general risk weights under § 628.32. (B) If the System institution purchases the credit protection from a counterparty that is a securitization SPE, the System institution must determine the risk weight for the exposure according to this section, including paragraph (a)(4) of this section for a credit derivative that has a first priority claim on the cash flows from the underlying exposures of the securitization SPE (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments). § 628.43 Simplified supervisory formula approach (SSFA) and the gross-up approach. (a) General requirements for the SSFA. (b) SSFA parameters. (1) K G K G K G (2) Parameter W W (i) Ninety (90) days or more past due; (ii) Subject to a bankruptcy or insolvency proceeding; (iii) In the process of foreclosure; (iv) Held as real estate owned; (v) Has contractually deferred interest payments for 90 days or more, other than principal or interest payments deferred on: (A) Federally guaranteed student loans, in accordance with the terms of those guarantee programs; or (B) Consumer loans, including non-federally guaranteed student loans, provided that such payments are deferred pursuant to provisions included in the contract at the time funds are disbursed that provide for periods(s) of deferral that are not initiated based on changes in the creditworthiness of the borrower; or (vi) Is in default. (3) Parameter A A A A (4) Parameter D D A pari passu D (5) A supervisory calibration parameter, p, (c) Mechanics of the SSFA K G W K A K G K A A D K A (1) When the detachment point, parameter D K A (2) When the attachment point, parameter A K A (3) When A K A D K A K SSFA (i) The weight assigned to 1,250 percent equals: (ii) The weight assigned to 1,250 percent times K SSFA (iii) The risk weight will be set equal to: (d) SSFA equation. K A G (2) Then the System institution must calculate K SSFA Where: (3) The risk weight for the exposure (expressed as a percent) is equal to K SSFA × 1,250. (e) Gross-up approach Applicability. (2) To use the gross-up approach, a System institution must calculate the following four inputs: (i) Pro rata share A X Y (ii) Enhanced amount B (iii) Exposure amount (carrying value) C (iv) Risk weight ( RW RW (3) Credit equivalent amount (CEA). (i) The exposure amount C (ii) The pro rata share A B CEA = C + (A × B) (4) Risk-weighted assets (RWA) RWA RW CEA RWA = RW × CEA (f) Limitations. [81 FR 49779, July 28, 2016, as amended at 86 FR 54360, Oct. 1, 2021] § 628.44 Securitization exposures to which the SSFA and gross-up approach do not apply. (a) General requirement. (b) [Reserved] § 628.45 Recognition of credit risk mitigants for securitization exposures. (a) General. (2) An investing System institution that has obtained a credit risk mitigant to hedge a securitization exposure may recognize the credit risk mitigant under § 628.36 or § 628.37, but only as provided in this section. (b) Mismatches. §§ 628.46-628.50 [Reserved] Risk-Weighted Assets for Equity Exposures § 628.51 Introduction and exposure measurement. (a) General. (2)-(3) [Reserved] (b) Adjusted carrying value. (1) For the on-balance sheet component of an equity exposure (other than an equity exposure that is classified as available-for-sale), the System institution's carrying value of the exposure; (2) For the on-balance sheet component of an equity exposure that is classified as available-for-sale, the System institution's carrying value of the exposure less any net unrealized gains on the exposure that are reflected in such carrying value but excluded from the System institution's regulatory capital components; (3) For the off-balance sheet component of an equity exposure that is not an equity commitment, the effective notional principal amount of the exposure, the size of which is equivalent to a hypothetical on-balance sheet position in the underlying equity instrument that would evidence the same change in fair value (measured in dollars) given a small change in the price of the underlying equity instrument, minus the adjusted carrying value of the on-balance sheet component of the exposure as calculated in paragraph (b)(1) of this section; and (4) For a commitment to acquire an equity exposure (an equity commitment), the effective notional principal amount of the exposure is multiplied by the following conversion factors (CFs): (i) Conditional equity commitments with an original maturity of 14 months or less receive a CF of 20 percent. (ii) Conditional equity commitments with an original maturity of over 14 months receive a CF of 50 percent. (iii) Unconditional equity commitments receive a CF of 100 percent. § 628.52 Simple risk-weight approach (SRWA). (a) General. (b) SRWA computation for individual equity exposures. (1) Zero-percent (0%) risk weight equity exposures. (2) Twenty-percent (20%) risk weight equity exposures. (3) One hundred-percent (100%) risk weight equity exposures. (i) [Reserved] (ii) Effective portion of hedge pairs. (iii) Non-significant equity exposures. (A) Equity exposures subject to paragraph (b)(3)(iii) of this section include: ( 1 ( 2 ( 3 et seq. (B) To compute the aggregate adjusted carrying value of a System institution's equity exposures for purposes of this section, the System institution may exclude equity exposures described in paragraphs (b)(1) and (2) and (b)(3)(ii) of this section, the equity exposure in a hedge pair with the smaller adjusted carrying value, and a proportion of each equity exposure to an investment fund equal to the proportion of the assets of the investment fund that are not equity exposures or that meet the criterion of paragraph (b)(3)(i) of this section. If a System institution does not know the actual holdings of the investment fund, the System institution may calculate the proportion of the assets of the fund that are not equity exposures based on the terms of the prospectus, partnership agreement, or similar contract that defines the fund's permissible investments. If the sum of the investment limits for all exposure classes within the fund exceeds 100 percent, the System institution must assume for purposes of this section that the investment fund invests to the maximum extent possible in equity exposures. (C) When determining which of a System institution's equity exposures qualify for a 100-percent risk weight under this paragraph, a System institution first must include equity exposures to unconsolidated rural business investment companies or held through consolidated rural business investment companies described in 7 U.S.C. 2009cc et seq.; (4) Other equity exposures. (5)-(6) [Reserved] (7) Six hundred-percent (600%) risk weight equity exposures. (i) Would meet the definition of a traditional securitization in § 628.2 were it not for the application of paragraph (8) of that definition; and (ii) Has greater than immaterial leverage. (c) Hedge transactions Hedge pair. (2) Effective hedge. (i) Under the dollar-offset method of measuring effectiveness, the System institution must determine the ratio of value change (RVC). The RVC is the ratio of the cumulative sum of the changes in value of one equity exposure to the cumulative sum of the changes in the value of the other equity exposure. If RVC is positive, the hedge is not effective and E equals 0. If RVC is negative and greater than or equal to −1 (that is, less than 0 and greater than or equal to −1), then E equals the absolute value of RVC. If RVC is negative and less than −1, then E equals 2 plus RVC. (ii) Under the variability-reduction method of measuring effectiveness: Where: X t A t B t A t Bt (iii) Under the regression method of measuring effectiveness, E equals the coefficient of determination of a regression in which the change in value of one exposure in a hedge pair is the dependent variable and the change in value of the other exposure in a hedge pair is the independent variable. However, if the estimated regression coefficient is positive, then E equals 0. (3) The effective portion of a hedge pair is E multiplied by the greater of the adjusted carrying values of the equity exposures forming a hedge pair. (4) The ineffective portion of a hedge pair is (1-E) multiplied by the greater of the adjusted carrying values of the equity exposures forming a hedge pair. [81 FR 49779, July 28, 2016, as amended at 86 FR 54360, Oct. 1, 2021] § 628.53 Equity exposures to investment funds. (a) Available approaches. (2) [Reserved] (3) If an equity exposure to an investment fund is part of a hedge pair and the System institution does not use the full look-through approach, the System institution must use the ineffective portion of the hedge pair as determined under § 628.52(c) as the adjusted carrying value for the equity exposure to the investment fund. The risk-weighted asset amount of the effective portion of the hedge pair is equal to its adjusted carrying value. (b) Full look-through approach. (1) The aggregate risk-weighted asset amounts of the exposures held by the fund as if they were held directly by the System institution; and (2) The System institution's proportional ownership share of the fund. (c) Simple modified look-through approach. (d) Alternative modified look-through approach. §§ 628.54-628.60 [Reserved] Disclosures § 628.61 Purpose and scope. Sections 628.62 and 628.63 establish public disclosure requirements for each System bank related to the capital requirements contained in this part. § 628.62 Disclosure requirements. (a) A System bank must provide timely public disclosures each calendar quarter of the information in the applicable tables in § 628.63. The System bank must make these disclosures in its quarterly and annual reports to shareholders required in part 620 of this chapter. The System bank need not make these disclosures in the format set out in the applicable tables or all in the same location in a report, as long as a summary table specifically indicating the location(s) of all such disclosures is provided. If a significant change occurs, such that the most recent reported amounts are no longer reflective of the System bank's capital adequacy and risk profile, then a brief discussion of this change and its likely impact must be disclosed as soon as practicable thereafter. This disclosure requirement may be satisfied by providing a notice under § 620.15 of this chapter. Qualitative disclosures that typically do not change each quarter (for example, a general summary of the System bank's risk management objectives and policies, reporting system, and definitions) may be disclosed annually after the end of the 4th calendar quarter, provided that any significant changes are disclosed in the interim. (b) A System bank must have a formal disclosure policy approved by the board of directors that addresses its approach for determining the disclosures it makes. The policy must address the associated internal controls and disclosure controls and procedures. The board of directors and senior management are responsible for establishing and maintaining an effective internal control structure over financial reporting, including the disclosures required by this subpart, and must ensure that appropriate review of the disclosures takes place. The chief executive officer, the chief financial officer, and a designated board member must attest that the disclosures meet the requirements of this subpart. (c) If a System bank concludes that disclosure of specific proprietary or confidential commercial or financial information that it would otherwise be required to disclose under this section would compromise its position, then the System bank is not required to disclose that specific information pursuant to this section, but must disclose more general information about the subject matter of the requirement, together with the fact that, and the reason why, the specific items of information have not been disclosed. § 628.63 Disclosures. (a) Except as provided in § 628.62, a System bank must make the disclosures described in Tables 1 through 10 of this section. The System bank must make these disclosures publicly available for each of the last 3 years (that is, 12 quarters) or such shorter period beginning on January 1, 2017. (b) A System bank must publicly disclose each quarter the following: (1) CET1 capital, tier 1 capital, and total capital ratios, including all the regulatory capital elements and all the regulatory adjustments and deductions needed to calculate the numerator of such ratios; (2) Total risk-weighted assets, including the different regulatory adjustments and deductions needed to calculate total risk-weighted assets; (3) [Reserved] (4) A reconciliation of regulatory capital elements using month-end balances as they relate to its balance sheet in any applicable audited consolidated financial statements. The reconciliation must include a statement that compliance with the regulatory capital requirements outlined in subpart B of this part is determined using average daily balances for the most recent 3 months. Table 1 to § 628.63—Scope of Application Qualitative Disclosures (a) The name of the top corporate entity in the group to which this subpart applies. 1 (b) A brief description of the differences in the basis for consolidating entities 2 (1) That are fully consolidated; (2) That are deconsolidated and deducted from total capital; (3) For which the total capital requirement is deducted; and (4) That are neither consolidated nor deducted (for example, where the investment in the entity is assigned a risk weight in accordance with this subpart). (c) Any restrictions, or other major impediments, on transfer of funds or total capital within the group. Quantitative Disclosures (d) [Reserved] (e) The aggregate amount by which actual total capital is less than the minimum total capital requirement in all subsidiaries, with total capital requirements and the name(s) of the subsidiaries with such deficiencies. 1 2 Table 2 to § 628.63—Capital Structure Qualitative Disclosures (a) Summary information on the terms and conditions of the main features of all regulatory capital instruments. Quantitative Disclosures (b) The amount of common equity tier 1 capital, with separate disclosure of: (1) Common cooperative equities a. Statutory minimum purchased borrower stock; b. Other required member purchased stock; c. Allocated equities (stock or surplus): 1. Qualified allocated equities subject to retirement; 2. Nonqualified allocated equities subject to retirement; 3. Nonqualified allocated equities not subject to retirement; (2) Unallocated retained earnings (URE); (3) Paid-in capital; and (4) Regulatory adjustments and deductions made to common equity tier 1 capital. (c) The amount of tier 1 capital, with separate disclosure of: (1) Additional tier 1 capital elements; and (2) Regulatory adjustments and deductions made to tier 1 capital. (d) The amount of total capital, with separate disclosure of: (1) Common cooperative equities not included in common equity tier 1 capital; (2) Tier 2 capital elements, including tier 2 capital instruments; and (3) Regulatory adjustments and deductions made to total capital, including deductions of third-party capital under § 628.23. Table 3 to § 628.63—Capital Adequacy Qualitative disclosures (a) A summary discussion of the System bank's approach to assessing the adequacy of its capital to support current and future activities. Quantitative disclosures (b) Risk-weighted assets for: (1) Exposures to sovereign entities; (2) Exposures to certain supranational entities and MDBs; (3) Exposures to GSEs; (4) Exposures to depository institutions, foreign banks, and credit unions, including OFI exposures that are risk weighted as exposures to U.S. depository institutions and credit unions; (5) Exposures to PSEs; (6) Corporate exposures, including borrower loans (including agricultural and consumer loans) and OFI exposures that are not risk weighted as exposures to U.S. depository institutions and credit unions; (7) Residential mortgage exposures; (8) HVCRE exposures; (9) Past due and nonaccrual exposures; (10) Exposures to other assets; (11) Cleared transactions; (12) Unsettled transactions; (13) Securitization exposures; and (14) Equity exposures. (c) [Reserved] (d) Common equity tier 1, tier 1 and total risk-based capital ratios for the System bank. (e) Total standardized risk-weighted assets. Table 4 to § 628.63—Capital Buffers Quantitative Disclosures (a) At least quarterly, the System bank must calculate and publicly disclose the capital conservation buffer and leverage buffer as described under § 628.11. (b) At least quarterly, the System bank must calculate and publicly disclose the eligible retained income of the System bank, as described under § 628.11. (c) At least quarterly, the System bank must calculate and publicly disclose any limitations it has on distributions and discretionary bonus payments resulting from the buffer framework described under § 628.11, including the maximum payout amount and/or maximum leverage payout amount for the quarter. (c) General qualitative disclosure requirement. Table 5 to § 628.63 1 Qualitative Disclosures (a) The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk disclosed in accordance with Table 6 of this section), including the: (1) Policy for determining past due or delinquency status; (2) Policy for placing loans in nonaccrual status; (3) Policy for returning loans to accrual status; (4) Definition of and policy for identifying impaired loans (for financial accounting purposes); (5) Description of the methodology that the System bank uses to estimate its adjusted allowance for credit losses, including statistical methods used where applicable; (6) Policy for charging-off uncollectible amounts; and (7) Discussion of the System bank's credit risk management policy. Quantitative Disclosures (b) Total credit risk exposures and average credit risk exposures, after accounting offsets in accordance with GAAP, without taking into account the effects of credit risk mitigation techniques (for example, collateral and netting not permitted under GAAP), over the period categorized by major types of credit exposure. For example, System banks could use categories similar to that used for financial statement purposes. Such categories might include, for instance: (1) Loans, off-balance sheet commitments, and other non-derivative off-balance sheet exposures; (2) Debt securities; and (3) OTC derivatives. 2 (c) Geographic distribution of exposures, categorized in significant areas by major types of credit exposure. 3 (d) Industry or counterparty type distribution of exposures, categorized by major types of credit exposure. (e) By major industry or counterparty type: (1) Amount of impaired loans for which there was a related allowance under GAAP; (2) Amount of impaired loans for which there was no related allowance under GAAP; (3) Amount of loans past due 90 days and in nonaccrual status; (4) Amount of loans past due 90 days and still accruing; 4 (5) The balance in the adjusted allowance for credit losses at the end of each period according to GAAP; and (6) Charge-offs during the period. (f) Amount of impaired loans and, if available, the amount of past due loans categorized by significant geographic areas including, if practical, the amounts of allowances related to each geographical area, 5 (g) Reconciliation of changes in adjusted allowance for credit losses. 6 (h) Remaining contractual maturity delineation (for example, one year or less) of the whole portfolio, categorized by credit exposure. 1 2 See 3 4 5 6 Table 6 to § 628.63—General Disclosure for Counterparty Credit Risk-Related Exposures Qualitative Disclosures (a) The general qualitative disclosure requirement with respect to OTC derivatives, eligible margin loans, and repo-style transactions, including a discussion of: (1) The methodology used to assign credit limits for counterparty credit exposures; Policies for securing collateral, valuing and managing collateral, and establishing credit reserves; (3) The primary types of collateral taken; and (4) The impact of the amount of collateral the System bank would have to provide given deterioration in the System bank's own creditworthiness. Quantitative Disclosures (b) Gross positive fair value of contracts, collateral held (including type, for example, cash, government securities), and net unsecured credit exposure. 1 2 (c) Notional amount of purchased credit derivatives used for the System bank's own credit portfolio. 1 2 Table 7 to § 628.63—Credit Risk Mitigation 1 2 Qualitative Disclosures (a) The general qualitative disclosure requirement with respect to credit risk mitigation, including: (1) Policies and processes for collateral valuation and management; (2) A description of the main types of collateral taken by the System bank; (3) The main types of guarantors/credit derivative counterparties and their creditworthiness; and (4) Information about (market or credit) risk concentrations with respect to credit risk mitigation. Quantitative Disclosures (b) For each separately disclosed credit risk portfolio, the total exposure that is covered by eligible financial collateral, and after the application of haircuts. (c) For each separately disclosed portfolio, the total exposure that is covered by guarantees/credit derivatives and the risk-weighted asset amount associated with that exposure. 1 2 Table 8 to § 628.63—Securitization 1 Qualitative Disclosures (a) The general qualitative disclosure requirement with respect to a securitization (including synthetic securitizations), including a discussion of: (1) The System bank's objectives for securitizing assets, including the extent to which these activities transfer credit risk of the underlying exposures away from the System bank to other entities and including the type of risks assumed and retained with resecuritization activity; 2 (2) The nature of the risks ( e.g. (3) The roles played by the System bank in the securitization process 3 (4) The processes in place to monitor changes in the credit and market risk of securitization exposures including how those processes differ for resecuritization exposures; (5) The System bank's policy for mitigating the credit risk retained through securitization and resecuritization exposures; and (6) The risk-based capital approaches that the System bank follows for its securitization exposures including the type of securitization exposure to which each approach applies. (b) [Reserved] (c) Summary of the System bank's accounting policies for securitization activities, including: (1) Whether the transactions are treated as sales or financings; (2) Recognition of gain-on-sale; (3) Methods and key assumptions applied in valuing retained or purchased interests; (4) Changes in methods and key assumptions from the previous period for valuing retained interests and impact of the changes; (5) Treatment of synthetic securitizations; (6) How exposures intended to be securitized are valued and whether they are recorded under subpart D of this part; and (7) Policies for recognizing liabilities on the balance sheet for arrangements that could require the System bank to provide financial support for securitized assets. (d) An explanation of significant changes to any quantitative information since the last reporting period. Quantitative Disclosures (e) The total outstanding exposures securitized by the System bank in securitizations that meet the operational criteria provided in § 628.41 (categorized into traditional and synthetic securitizations), by exposure type. 4 (f) For exposures securitized by the System bank in securitizations that meet the operational criteria in § 628.41: (1) Amount of securitized assets that are impaired/past due categorized by exposure type; 5 (2) Losses recognized by the System bank during the current period categorized by exposure type. 6 (g) The total amount of outstanding exposures intended to be securitized categorized by exposure type. (h) Aggregate amount of: (1) On-balance sheet securitization exposures retained or purchased categorized by exposure type; and (2) Off-balance sheet securitization exposures categorized by exposure type. (i) (1) Aggregate amount of securitization exposures retained or purchased and the associated capital requirements for these exposures, categorized between securitization and resecuritization exposures, further categorized into a meaningful number of risk weight bands and by risk-based capital approach ( e.g., (2) Exposures that have been deducted entirely from tier 1 capital, CEIOs deducted from total capital (as described in § 628.42(a)(1)), and other exposures deducted from total capital should be disclosed separately by exposure type. (j) Summary of current year's securitization activity, including the amount of exposures securitized (by exposure type), and recognized gain or loss on sale by exposure type. (k) Aggregate amount of resecuritization exposures retained or purchased categorized according to: (1) Exposures to which credit risk mitigation is applied and those not applied; and (2) Exposures to guarantors categorized according to guarantor creditworthiness categories or guarantor name. 1 2 3 4 5 6 Table 9 to § 628.63—Equities Qualitative Disclosures (a) The general qualitative disclosure requirement with respect to equity risk: (1) Differentiation between holdings on which capital gains are expected and those taken under other objectives including for relationship and strategic reasons; and (2) Discussion of important policies covering the valuation of and accounting for equity. This includes the accounting techniques and valuation methodologies used, including key assumptions and practices affecting valuation as well as significant changes in these practices. Quantitative Disclosures (b) Value disclosed on the balance sheet of investments, as well as the fair value of those investments; for securities that are publicly traded, a comparison to publicly quoted share values where the share price is materially different from fair value. (c) The types and nature of investments, including the amount that is: (1) Publicly traded; and (2) Non-publicly traded. (d) The cumulative realized gains (losses) arising from sales and liquidations in the reporting period. (e) (1) Total unrealized gains (losses). 1 (2) Total latent revaluation gains (losses). 2 (3) Any amounts of the above included in tier 1 or tier 2 capital. (f) [Reserved] 1 2 Table 10 to § 628.63—Interest Rate Risk for Non-Trading Activities Qualitative disclosures (a) The general qualitative disclosure requirement, including the nature of interest rate risk for non-trading activities and key assumptions, including assumptions regarding loan prepayments and behavior of non-maturity deposits, and frequency of measurement of interest rate risk for non-trading activities. Quantitative disclosures (b) The increase (decline) in earnings or economic value (or market value of equity or other relevant measure used by management) for upward and downward rate shocks according to management's method for measuring interest rate risk for non-trading activities, categorized by currency (as appropriate). [81 FR 49779, July 28, 2016, as amended at 86 FR 54360, Oct. 1, 2021; 87 FR 27493, May 9, 2022; 89 FR 25130, Apr. 10, 2024] §§ 628.64-628.99 [Reserved] Subparts E-F [Reserved] Subpart G—Transition Provisions § 628.300 Transitions. (a) Capital conservation buffer. (2) Beginning January 1, 2017 through December 31, 2019 a System institution's maximum capital conservation buffer payout ratio must be determined as set forth in Table 1 to § 628.300. Table 1 to § 628.300 Transition Period Capital conservation buffer Maximum Calendar year 2017 >0.625 percent No limitation. ≤0.625 percent, and >0.469 percent 60 percent. ≤0.469 percent, and >0.313 percent 40 percent. ≤0.313 percent, and >0.156 percent 20 percent. ≤0.156 percent 0 percent. Calendar year 2018 >1.25 percent No limitation. ≤1.25 percent, and >0.938 percent 60 percent. ≤0.938 percent, and >0.625 percent 40 percent. ≤0.625 percent, and >0.313 percent 20 percent. ≤0.313 percent 0 percent. Calendar year 2019 >1.875 percent No limitation. ≤1.875 percent, and >1.406 percent 60 percent. ≤1.406 percent, and >0.938 percent 40 percent. ≤0.938 percent, and >0.469 percent 20 percent. ≤0.469 percent 0 percent. (b)-(e) [Reserved] § 628.301 Initial compliance and reporting requirements. (a) A System institution that fails to satisfy one or more of its minimum applicable CET1, tier 1, or total risk-based capital ratios or its tier 1 leverage ratio at the end of the quarter in which these regulations become effective shall report its initial noncompliance to the FCA within 20 days following such quarterend and shall also submit a capital restoration plan for achieving and maintaining the standards, demonstrating appropriate annual progress toward meeting the goal, to the FCA within 60 days following such quarterend. If the capital restoration plan is not approved by the FCA, the FCA will inform the institution of the reasons for disapproval, and the institution shall submit a revised capital restoration plan within the time specified by the FCA. (b) Approval of compliance plans. (1) The conditions or circumstances leading to the institution's falling below minimum levels, the exigency of those circumstances, and whether or not they were caused by actions of the institution or were beyond the institution's control; (2) The overall condition, management strength, and future prospects of the institution and, if applicable, affiliated System institutions; (3) The institution's capital, adverse assets (including nonaccrual and nonperforming loans), ALL, and other ratios compared to the ratios of its peers or industry norms; (4) How far an institution's ratios are below the minimum requirements; (5) The estimated rate at which the institution can reasonably be expected to generate additional earnings; (6) The effect of the business changes required to increase capital; (7) The institution's previous compliance practices, as appropriate; (8) The views of the institution's directors and senior management regarding the plan; and (9) Any other facts or circumstances that the FCA deems relevant. (c) An institution shall be deemed to be in compliance with the regulatory capital requirements of this subpart if it is in compliance with a capital restoration plan that is approved by the FCA within 180 days following the end of the quarter in which these regulations become effective. Appendix A to Part 628—Loan-to-Value Limits for High Volatility Commercial Real Estate Exposures Table A sets forth the loan-to-value limits specified in paragraph (2)(iv)(A) of the definition of high volatility commercial real estate exposure in § 628.2. Table A: Loan-to-Value Limits for High Volatility Commercial Real Estate Exposures Loan category Loan-to-value Raw Land 65 Land development 75 Construction: Commercial, multifamily, 1 80 1- to 4-family residential 85 Improved property 85 Owner-occupied 1- to 4-family and home equity 2 1 2 [91 FR 3029, Jan. 26, 2026] The loan-to-value limits should be applied to the underlying property that collateralizes the loan. For loans that fund multiple phases of the same real estate project ( e.g., [89 FR 25130, Apr. 10, 2024, as amended at 91 FR 3029, Jan. 26, 2026]

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