Presentation on Standardized Approach NPR

>> Dan Frye: WELCOME TO THE
FDIC'S "COMMUNITY BANK
INFORMATION SESSION" ON THE
NOTICES OF PROPOSED RULEMAKING,
OR NPRS, ON REGULATORY CAPITAL.
I'M DAN FRYE, AND I'M THE AREA
DIRECTOR FOR THE NEW YORK REGION
OF THE FDIC.
>> Mark Moylan: AND I'M
MARK MOYLAN DEPUTY REGIONAL
DIRECTOR IN KANSAS CITY.
THE MATERIALS USED IN TODAY'S
PRESENTATION CAN ALSO BE FOUND
AT OUR WEBSITE AT WWW.FDIC.GOV.
>> Dan Frye: WE WILL BE COVERING
THE RECENTLY ISSUED NPRS FOR
THE BASEL III CAPITAL RULES AND
THE STANDARDIZED APPROACH.
>> Mark Moylan: THESE ARE TWO
SEPARATE PROPOSALS.
THIS PRESENTATION HAS BEEN
PREPARED BY FDIC STAFF TO
PROVIDE A GENERAL OVERVIEW OF
THE BASEL III AND STANDARDIZED
APPROACH NPRS.
THIS PRESENTATION DOES NOT
ADDRESS ALL ASPECTS OF THOSE
NPRS.
THEREFORE, BANKS ARE ENCOURAGED
TO REVIEW THE NPR DOCUMENTS AS
POSTED ON OUR WEBSITE.
THIS PRESENTATION IS A BRIEFING
IN NATURE, AND WE DO NOT EXPECT
YOU TO LEAVE THIS PRESENTATION
AS AN EXPERT ON THESE TWO
PROPOSALS.
IT IS ALSO NOT AN OFFICIAL
INTERPRETATION BY THE FDIC.
WE DO HOWEVER HOPE THE MATERIALS
PRESENTED ARE BENEFICIAL IN
IDENTIFYING AREAS OF INTEREST,
AND PROVIDE INSIGHT INTO THE
CONTENT OF THE PROPOSALS.
>> Dan Frye: THE FDIC'S GOAL AND
FOCUS OF THE PRESENTATION IS NOT
TO HAVE A COMPREHENSIVE
DISCUSSION OF ALL THE ELEMENTS
OF THE TWO PROPOSED REGULATIONS,
BUT FOCUS ON THOSE ELEMENTS THAT
ARE APPLICABLE TO THE LARGEST
NUMBER OF FINANCIAL INSTITUTIONS
WITH A PARTICULAR FOCUS ON
COMMUNITY BANKS.
>> Mark Moylan: YOU WILL NOTICE
ON THE PRESENTATION MATERIALS
THAT CERTAIN PORTIONS ARE
HIGHLIGHTED, AND THOSE AREAS
WILL BE DISCUSSED.
ALSO, YOU WILL NOTICE ON THE
UPPER RIGHT CORNER OF EACH SLIDE
WE WILL DESIGNATE WHICH OF THE
TWO PROPOSED RULES THE SLIDE
PERTAINS TO-- EITHER THE
BASEL III NPR OR THE
STANDARDIZED APPROACH NPR.
>> Dan Frye: SLIDE 3 REFLECTS
FOUR SEPARATE MATTERS THAT WERE
RECENTLY CONSIDERED AND APPROVED
BY THE FDIC'S BOARD OF
DIRECTORS.
TWO OF THESE MATTERS, ONE FINAL
RULE AND ONE PROPOSED RULE,
WHICH ARE HIGHLIGHTED IN GRAY ON
YOUR SLIDE, ARE GENERALLY NOT
APPLICABLE TO COMMUNITY BANKS.
THE OTHER TWO MATTERS THAT ARE
HIGHLIGHTED IN YELLOW, APPLY TO
ALL BANKS INCLUDING COMMUNITY
BANKS.
>> Mark Moylan: NOW I'D LIKE TO
INTRODUCE SUPERVISOR EXAMINER,
FRANK HUGHES, FROM OUR KANSAS
CITY REGION, WHO WILL BE
PRESENTING THE STANDARDIZED
APPROACH PROPOSAL.
>> Frank Hughes: ALRIGHT,
THANKS, MARK AND DAN.
SO I'M GOING TO TALK ABOUT THE
STANDARDIZED APPROACH NPR.
OKAY, LET'S START WITH A LITTLE
BACKGROUND ON WHY THE STANDARD
CHANGES TO THE STANDARDIZED
APPROACH ARE BEING PROPOSED.
THE PROPOSALS INVOLVE REVISIONS
TO THE RULES FOR CALCULATING
RISK-WEIGHTED ASSETS TO ENHANCE
RISK SENSITIVITY AND ADDRESS
WEAKNESSES IDENTIFIED OVER
RECENT YEARS.
IT ALSO INCORPORATES SOME
ELEMENTS OF THE BASEL II
STANDARDIZED APPROACH.
AND UNDER THE NEXT BULLET,
WE'VE IDENTIFIED SOME OF THE
MAIN CHANGES.
FIRST, IT REVISES CERTAIN
METHODOLOGIES FOR CALCULATING
RISK-WEIGHTED ASSETS.
IT PROPOSES ALTERNATIVES TO
CREDIT RATINGS FOR CALCULATING
RISK-WEIGHTED ASSETS FOR CERTAIN
TYPES OF ASSETS.
AND THAT'S CONSISTENT WITH
SECTION 939A OF THE DODD FRANK
ACT.
AND THEN FINALLY, THE PROPOSAL
WOULD BE EFFECTIVE JANUARY 1ST,
2015, BUT THERE IS AN OPTION FOR
EARLY ADOPTION BY INSTITUTIONS.
NOW, I'VE IDENTIFIED THE MAIN
CHANGES THERE, BUT THERE ARE
CERTAINLY SEVERAL OTHER ITEMS IN
THE PROPOSAL THAT WE ENCOURAGE
BANKS TO REVIEW.
HERE WE'VE ATTEMPTED TO IDENTIFY
WHAT WE THINK ARE THE MOST
WIDELY APPLICABLE EFFECTS ON
COMMUNITY BANKS WITH THE NEW
PROPOSAL, AND THIS WILL SERVE
AS A ROADMAP FOR THE REST OF
THE PRESENTATION.
FIRST, WE'LL START TALKING ABOUT
REVISED RISK WEIGHTING, THE
REVISED RISK WEIGHTING
METHODOLOGY FOR ON-BALANCE SHEET
ASSETS, AND THAT'S GOING TO
INCLUDE 1-4 FAMILY RESIDENTIAL
REAL ESTATE LOANS.
WE'LL TALK ABOUT HIGH VOLATILITY
COMMERCIAL REAL ESTATE.
WE'LL TALK ABOUT RISK WEIGHTING
OF PAST DUE ASSETS, STRUCTURED
SECURITIES, AND BANK EQUITY
HOLDINGS.
AND THEN WE'LL MOVE TO REVISED,
THE REVISED RISK-WEIGHTING
METHODOLOGY FOR OFF-BALANCE
SHEET ITEMS.
AND THEN, FINALLY, WE'LL TALK
ABOUT THE SUBSTITUTION OPTION
FOR FINANCIAL COLLATERAL AND
ELIGIBLE GUARANTORS WHEN
CALCULATING RISK-WEIGHTED
ASSETS.
THIS IS A RECAP OF THE
STANDARDIZED APPROACH.
THESE ARE THE TOPICS THAT ARE
COVERED UNDER THE PROPOSAL.
IT'S NOT AN ALL-INCLUSIVE LIST,
AND SIMPLY BECAUSE SOME OF THESE
ITEMS ARE ON THE LIST DOESN'T
MEAN THEY'RE PROPOSED CHANGES
FOR THOSE ITEMS, BUT THEY ARE
ADDRESSED IN THE PROPOSAL.
WE'RE GOING TO FOCUS OUR
PRESENTATION ON THE ITEMS THAT
ARE HIGHLIGHTED IN YELLOW.
RESIDENTIAL MORTGAGES,
COMMERCIAL REAL ESTATE, PAST DUE
EXPOSURES, AND THOSE OTHER ITEMS
THAT ARE IDENTIFIED THERE IN
YELLOW.
ALRIGHT, LET'S START WITH THE
ON-BALANCE SHEET ASSETS.
WE'RE GOING TO START WITH THE
1-4 FAMILY RESIDENTIAL
MORTGAGES.
THE PROPOSAL IDENTIFIES TWO
CATEGORIES IN 1-4 FAMILY
MORTGAGES, CATEGORY 1 AND
CATEGORY 2.
IN ORDER FOR A 1-4 FAMILY
MORTGAGE TO QUALIFY AS A
CATEGORY 1, IT MUST MEET THESE
CRITERIA.
THE TERM MUST BE LESS THAN OR
EQUAL TO 30 YEARS.
THE MORTGAGE MUST REQUIRE
PERIODIC PAYMENTS.
THERE MUST BE NO INCREASES IN
PRINCIPAL, DEFERMENTS, OR ANY
BALLOON FEATURES.
THE LOAN MUST BE PRUDENTLY
UNDERWRITTEN.
INTEREST CHANGE IS LIMITED TO 2%
PER YEAR, AND 6% OVER THE LIFE
OF THE LOAN.
A HELOCS CAN ALSO QUALIFY
AS A CATEGORY 1, 1-4 FAMILY
MORTGAGE AS LONG AS THEY'RE
FIRST POSITION AND THE LOAN IS
UNDERWRITTEN ASSUMING FULLY
ADVANCED PRINCIPAL AND INTEREST.
LOANS THAT ARE 90 DAYS PAST DUE
ARE NON-ACCRUAL OR OTHER CERTAIN
JUNIOR LIENS WOULD NOT QUALIFY
AS A CATEGORY 1 MORTGAGE.
CATEGORY 2 MORTGAGES WOULD
ESSENTIALLY BE ALL THE
RESIDENTIAL MORTGAGE EXPOSURES
INCLUDING CERTAIN JUNIOR LIENS
AND OTHER NON-TRADITIONAL
MORTGAGE PRODUCTS.
SO ONCE THE INSTITUTION HAS
DETERMINED WHETHER THEIR
MORTGAGE IS A CATEGORY 1 OR
CATEGORY 2 LOAN, THEY NEXT
NEED TO DETERMINE WHAT THE
LOAN-TO-VALUE IS.
AND WHEN DETERMINING THE
LOAN-TO-VALUE, THE BANK SHOULD
NOT CONSIDER PRIVATE MORTGAGE
INSURANCE COVERAGE.
SO, FOR EXAMPLE, ON THAT FIRST
LINE, THE BANK DETERMINES IT AS
A CATEGORY 1 LOAN, AND THE
LOAN-TO-VALUE IS LESS THAN OR
EQUAL TO 60%.
THAT RISK WEIGHTING WOULD BE
35%.
IF WE GO ALL THE WAY TO THE
BOTTOM, LET'S ASSUME THE BANK
HAS A LOAN-TO-VALUE OF GREATER
THAN 90% AND IT'S
A NON-TRADITIONAL MORTGAGE
PRODUCT, THAT LOAN WOULD BE
RISK-WEIGHTED AT 200%.
ALRIGHT, SO LET'S PROVIDE
A COUPLE EXAMPLES OF RISK
WEIGHTING 1-4 FAMILY MORTGAGES.
ALRIGHT, SO HERE WE HAVE SEVERAL
EXAMPLES OF 1-4 FAMILY
RESIDENTIAL REAL ESTATE
MORTGAGES, AND LET'S START
WITH THE FIRST ONE.
WE'VE GOT A 30-YEAR AMORTIZING
LOAN WITH A 30-YEAR MATURITY AND
THE LOAN IS CURRENT, LTV IS, THE
LOAN-TO-VALUE IS LESS THAN OR
EQUAL TO 60%.
PRESENTLY, THAT LOAN WOULD BE
RISK-WEIGHTED AT 50%, AND UNDER
THE PROPOSAL, THAT WOULD MOVE TO
A 35% RISK WEIGHTING.
AND BEFORE I MOVE ON DOWN THE
CHART, YOU'LL SEE THE COLOR
CONVENTIONS HERE, GRAY AND BLUE.
WE USE THE GRAY TO IDENTIFY RISK
WEIGHTINGS THAT ARE PRESENTLY
USED UNDER THE CAPITAL
REGULATIONS, AND THE BLUE IS
WHAT WOULD BE PROPOSED UNDER
THE STANDARDIZED APPROACH NPR.
ALRIGHT, SO LET'S MOVE DOWN TO
THE NEXT ONE, SAME LOAN BUT WITH
AN LTV OF GREATER THAN 60% AND
LESS THAN OR EQUAL TO 80%.
YOU CAN SEE THAT CURRENTLY THAT
LOAN WOULD BE RISK-WEIGHED AT
50%, AND UNDER THE PROPOSAL,
THAT WOULD CONTINUE WITH THE 50%
RISK WEIGHTING.
LET'S MOVE DOWN TO THE FOURTH
ONE.
WE HAVE A FIVE-YEAR BALLOON
WITH A 30-YEAR AMORTIZATION.
IT'S CURRENT, AND THE
LOAN-TO-VALUE IS LESS THAN
OR EQUAL TO 80%.
UNDER CURRENT CAPITAL
GUIDELINES, THAT RECEIVES A 50%
RISK WEIGHTING, BUT BECAUSE IT
HAS THE BALLOON FEATURE, UNDER
THE PROPOSAL, THAT WOULD MOVE TO
100% RISK WEIGHTING.
THEN FINALLY, LET'S LOOK AT THE
LAST ONE.
WE HAVE A STAND-ALONE JUNIOR
LIEN WITH A LOAN-TO-VALUE OF
GREATER THAN 90%.
UNDER THE CURRENT CAPITAL
GUIDELINES, THAT RECEIVES A 100%
RISK WEIGHT.
UNDER THE PROPOSAL, THAT WOULD
MOVE TO A 200% RISK WEIGHT.
ALRIGHT, CONTINUING ON WITH THE
RISK WEIGHT OF ON BALANCE SHEET
ASSETS, THE PROPOSAL IDENTIFIES
A NEW TERM, HIGH VOLATILITY
COMMERCIAL REAL ESTATE.
HIGH VOLATILITY COMMERCIAL REAL
ESTATE EQUALS AN ACQUISITION
DEVELOPMENT OF FINANCE OR
CONSTRUCTION FINANCING EXCEPT
THOSE THAT INVOLVE 1-4 FAMILY
RESIDENTIAL PROPERTIES, OR
PROJECTS IN WHICH THE
LOAN-TO-VALUE RATIO IS LESS THAN
OR EQUAL TO MAXIMUM SUPERVISORY
LOAN-TO-VALUE LIMITS, AND THE
BORROWERS CONTRIBUTED AT LEAST
15% OF AS COMPLETED APPRAISED
VALUE, AND THE BORROWERS
CONTRIBUTED THAT CAPITAL BEFORE
THE BANK ADVANCES FUNDS, AND THE
CAPITALS CONTRACTUALLY REQUIRED
TO REMAIN THROUGHOUT THE PROJECT
LIFE.
SO IF THE INSTITUTION HAS A HIGH
VOLATILITY COMMERCIAL REAL
ESTATE LOAN, IT WOULD RECEIVE
A RISK WEIGHTING OF 150%.
ON THE LEFT SIDE OF THE SCREEN,
YOU'LL SEE A CHART THERE THAT
DEMONSTRATES THAT
NON-RESIDENTIAL ACQUISITION
DEVELOPMENT, AND CONSTRUCTION
LENDING IS A SMALL SUBSET OF
COMMERCIAL REAL ESTATE, AND HIGH
VOLATILITY COMMERCIAL REAL
ESTATE IS EVEN A SMALLER PORTION
OF THAT.
ALRIGHT, CONTINUING ON WITH ON
BALANCE SHEET RISK WEIGHTING,
AGAIN WE'RE USING THE SAME COLOR
CONVENTION.
GRAY INDICATES WHAT THE RISK
WEIGHT IS CURRENTLY, AND BLUE IS
WHAT THE RISK WEIGHT IS PROPOSED
UNDER THE NPR.
WE'VE IDENTIFIED A COUPLE
COMMERCIAL REAL ESTATE LOANS
THERE.
OWNER-OCCUPIED OFFICE BUILDING
CURRENTLY RECEIVES 100% RISK
WEIGHT, AND UNDER THE PROPOSAL,
IT WOULD CONTINUE TO RECEIVE
100% RISK WEIGHT.
YOU CAN GO DOWN THE LIST THERE.
ON THE BOTTOM, WE'VE SHOWN WHAT
HIGH VOLATILITY COMMERCIAL REAL
ESTATE LOAN, HOW THAT WOULD BE
RISK-WEIGHTED, CURRENTLY WOULD
RECEIVE 100% RISK WEIGHT, AND
UNDER THE PROPOSAL, THAT WOULD
MOVE TO 150%.
ALRIGHT, LET'S TALK ABOUT PAST
DUE ASSETS AND HOW WE WOULD RISK
WEIGHT THOSE UNDER THE PROPOSAL.
ASSETS THAT ARE GREATER THAN OR
90 DAYS PAST DUE OR ARE
NONACCRUAL, WOULD RECEIVE NEW
RISK WEIGHTS.
WE'VE IDENTIFIED SOME TYPICAL
ASSETS FOR A COMMUNITY BANK.
FOR INSTANCE, A REVENUE BOND,
CURRENTLY IF THAT BOND WERE 90
DAYS PAST DUE OR NONACCRUAL, IT
WOULD RECEIVE A 50% RISK WEIGHT.
UNDER THE PROPOSAL, THAT WOULD
MOVE TO 150%.
MULTI-FAMILY CONSUMER LOANS,
COMMERCIAL AND INDUSTRIAL LOANS
ALL THE WAY DOWN TO AGRICULTURAL
LOANS, CURRENTLY WOULD RECEIVE
100% RISK WEIGHT IF THEY WERE
PAST DUE 90 DAYS OR MORE OR ARE
NON-ACCRUAL UNDER THE NPR, THOSE
WOULD MOVE TO 150% RISK WEIGHT.
NOW, THESE RISK WEIGHTINGS FOR
PAST DUE ASSETS WOULD NOT APPLY
TO 1-4 FAMILY RESIDENTIAL REAL
ESTATE EXPOSURES OR HIGH
VOLATILITY COMMERCIAL REAL
ESTATE.
AND IF YOU REMEMBER THE SLIDES
ON 1-4 FAMILY RESIDENTIAL
EXPOSURES, THOSE RISK WEIGHTS
DEPEND ON WHETHER THEY'RE
CATEGORY 1 OR CATEGORY 2 LOANS
AND THEIR LTVS, AND WE JUST
DISCUSSED THE RISK WEIGHTING
FOR HIGH VOLATILITY COMMERCIAL
REAL ESTATES.
THOSE RECEIVE 150% RISK WEIGHT
ALREADY UNDER THE PROPOSAL, AND
THAT WOULD NOT CHANGE IF THEY
WERE PAST DUE GREATER THAN 90
DAYS OR ARE NON-ACCRUAL.
CONTINUING ON WITH STRUCTURED
SECURITIES, THE PROPOSAL
ADDRESSES RISK WEIGHTINGS FOR
PRIVATE LABEL MORTGAGE BACKED
SECURITIES, TRUST PREFERRED
COLLATERALIZED DEBT OBLIGATIONS,
AND ASSET BACKED SECURITIES.
AND WHAT'S IMPORTANT HERE IS
THAT WE'RE NOT TALKING ABOUT
GOVERNMENT SPONSORED ENTITY
DEBT, MORTGAGE BACKED SECURITIES
OR CMOS OR MUNICIPAL SECURITIES.
WE'RE JUST TALKING ABOUT THE
PRIVATE LABELS, TRUST PREFERREDS
AND ASSET BACKED SECURITIES.
THE PROPOSAL IDENTIFIES THREE
APPROACHES, TWO OF WHICH ALREADY
EXIST.
THE INSTITUTION CAN RISK WEIGHT
BASED ON ONE OF THE FOLLOWING:
THE WEIGHTED AVERAGE OF THE
UNDERLYING COLLATERAL IN THE
SECURITY, THAT'S THE GROSS UP
APPROACH AND THAT CURRENTLY IS
AVAILABLE TO INSTITUTIONS.
THE INSTITUTION CAN USE A
FORMULA-BASED APPROACH BASED ON
THE SUBORDINATION POSITION OF
THE SECURITY AND DELINQUENCIES
OF THE UNDERLYING COLLATERAL,
AND THAT'S CALLED THE SIMPLIFIED
SUPERVISORY FORMULA APPROACH.
WE'RE NOT GOING TO TALK ABOUT
THAT HERE DURING THE
PRESENTATION.
BUT IF YOUR INSTITUTION HOLDS
A LOT OF THESE TYPES OF
SECURITIES, WE ENCOURAGE YOU TO
TAKE A LOOK AT THE NPR.
THEN THE FINAL APPROACH, THE
INSTITUTION CAN RISK WEIGHT
THESE EXPOSURES AT 1,250%.
IMPORTANTLY, THE NPR ELIMINATES
THE RATINGS BASED APPROACH.
INSTITUTIONS WILL NO LONGER BE
ABLE TO USE THE CREDIT AGENCIES
TO ASSIST IN THE RISK WEIGHTING
OF THESE TYPES OF ASSETS.
SOME OF THE OTHER REQUIREMENTS
UNDER THE PROPOSAL, THE
INSTITUTION MUST APPLY THE
APPROACH THEY SELECT
CONSISTENTLY, WHETHER IT'S THE
GROSS UP APPROACH OR THE
SIMPLIFIED SUPERVISORY FORMULA
APPROACH.
NOW, THEY CAN DEFAULT TO THE
1,250% RISK WEIGHT OPTION
REGARDLESS OF THE APPROACH
SELECTED.
ONE OTHER ITEM OF NOTE,
INSTITUTIONS ARE REQUIRED TO
DEMONSTRATE A COMPREHENSIVE
UNDERSTANDING OF THE SECURITIES
THAT THEY'VE PURCHASED, AND THEY
MUST DEMONSTRATE APPROPRIATE DUE
DILIGENCE PRIOR TO PURCHASE.
IF THEY CANNOT DEMONSTRATE THAT
TO THE SATISFACTORY--
SATISFACTION OF THE REGULATOR,
THEN THE 1,250% RISK WEIGHTING
WOULD APPLY.
OKAY, CONTINUING ON WITH ON
BALANCE SHEET RISK WEIGHTING,
LET'S DISCUSS EQUITY EXPOSURES.
AND AGAIN, WE'RE USING THE SAME
COLOR CONVENTION, GRAY AND BLUE.
FEDERAL RESERVE BANK STOCK
CURRENTLY RECEIVES A 0% RISK
WEIGHT.
UNDER THE PROPOSAL, THAT WOULD
CONTINUE AT 0%.
THE SAME IS TRUE WITH FEDERAL
LOAN BANK STOCK 20 CURRENTLY AND
20 UNDER THE PROPOSAL.
NOW, IF YOU MOVE DOWN TO AN
INVESTMENT OF COMMON STOCK IN
AN UNCONSOLIDATED FINANCIAL
INSTITUTION, UNLESS THAT
EXPOSURE HAS ALREADY BEEN
DEDUCTED, THAT RISK WEIGHT WOULD
MOVE FROM 100% TO 250%.
A PUBLICALLY TRADED EQUITY
EXPOSURE CURRENTLY RECEIVES 100%
UNDER RISK WEIGHT THAT WOULD
MOVE TO 300% UNDER THE PROPOSAL.
AND AN EQUITY EXPOSURE THAT IS
NOT PUBLICALLY TRADED, MOVES
FROM 100% TO 400%, AND THEN YOU
CAN SEE THE HEDGE FUND EXPOSURE
MOVES FROM 100% TO 600%.
ALSO NOTE THAT FOR
NON-SIGNIFICANT INVESTMENTS IN
THESE EQUITY EXPOSURES, A LOWER
RISK WEIGHT MAY APPLY.
ALRIGHT, SO WE FINISHED UP WITH
ON-BALANCE SHEET RISK WEIGHTING,
LET'S MOVE TO SOME OFF BALANCE
SHEET RISK WEIGHTING, AND WE'LL
TALK ABOUT CREDIT CONVERSIONS
HERE.
JUST A COUPLE OF EXAMPLES HERE,
SAME COLOR CONVENTION.
UNUSED PORTIONS OF COMMITMENTS
THAT ARE UNCONDITIONALLY
CANCELABLE BY A BANK CURRENTLY
RECEIVE A CREDIT CONVERSION
FACTOR OF ZERO, AND UNDER THE
PROPOSAL, THAT WOULD REMAIN THE
SAME.
OF NOTE HERE IS THE COMMITMENTS
WITHIN AN ORIGINAL MATURITY OF
LESS THAN OR EQUAL TO A YEAR
THAT ARE NOT UNCONDITIONALLY
CANCELABLE, CURRENTLY RECEIVE
A 0% CREDIT CONVERSION.
THAT WOULD MOVE TO 20% UNDER THE
PROPOSAL.
AND THEN, YOU CAN SEE FOR
COMMITMENTS WITH AN ORIGINAL
MATURITY OF GREATER THAN ONE
YEAR, CURRENTLY RECEIVE A 50%
CREDIT CONVERSION AND THAT WOULD
REMAIN THE SAME UNDER THE NPR.
IN ADDITION, PLEASE REFER TO THE
1-4 FAMILY MORTGAGE SECTIONS OF
THE PROPOSAL FOR HELOCS.
ALRIGHT, CONTINUING WITH OFF
BALANCE SHEET RISK WEIGHTING OF
ITEMS, LET'S TALK ABOUT MORTGAGE
BANKING.
MANY INSTITUTIONS OF 1-4 FAMILY
MORTGAGES WITH CREDIT ENHANCING
REPRESENTATIONS AND WARRANTIES
INCLUDING EARLY PAYMENT DEFAULTS
AND PREMIUM REFUND CLAUSES,
UNDER EXISTING TREATMENT,
CURRENT REGULATIONS PROVIDE
EXCLUSIONS FOR EARLY PAYMENT
DEFAULT OR PREMIUM REFUND
CLAUSES THAT ARE EFFECTIVE FOR
120 DAYS OR LESS.
UNDER THE PROPOSED TREATMENT,
THIS 120-DAY EXCLUSION IS
ELIMINATED AND ALL-EARLY PAYMENT
DEFAULT AND PREMIUM REFUND
CLAUSES ARE TREATED AS
OFF-BALANCE SHEET GUARANTEES FOR
THE DURATION OF THE ENHANCEMENT.
THE PROPOSED RISK WEIGHT FOR
THESE MORTGAGES WOULD RECEIVE A
CREDIT CONVERSION FACTOR OF 100%
AND THEN THE INSTITUTION WOULD
RISK WEIGHT THOSE MORTGAGES FROM
35 TO 200% BASED ON WHETHER THE
MORTGAGE WAS A CATEGORY 1 OR
CATEGORY 2 AS WE DISCUSSED
EARLIER.
NEXT, LET'S TALK ABOUT RISK
WEIGHTING SUBSTITUTION.
WE'LL START WITH COLLATERALIZED
TRANSACTIONS.
WHAT WE'RE TALKING ABOUT HERE AS
A GOOD EXAMPLE WOULD BE A LOAN.
UNDER THE PROPOSAL, THE BANK MAY
SUBSTITUTE THE ASSETS RISK
WEIGHT WITH THE COLLATERAL'S
RISK WEIGHT.
WE'VE GOT SOME EXAMPLES HERE,
AND AGAIN, WE'RE USING THE SAME
COLOR CONVENTION.
SO, FOR INSTANCE, IF AN
INSTITUTION HAS A LOAN SECURED
BY CASH-ON-DEPOSIT, PRESENTLY
THAT WOULD RECEIVE A 20% RISK
WEIGHT.
BUT UNDER THE PROPOSAL, THE BANK
COULD RISK WEIGHT THAT AT ZERO.
THE SAME IS TRUE WITH US
GOVERNMENT SECURITIES ALTHOUGH,
THE BANK MUST APPLY A 20%
DISCOUNT TO THE MARKET VALUE.
GOVERNMENT SPONSORED ENTITIES
SECURITIES, THE SERVICE
COLLATERAL CURRENTLY RECEIVES
A 20% RISK WEIGHT, AND UNDER
THE PROPOSAL WOULD CONTINUE TO
RECEIVE A 20% RISK WEIGHT.
NOW, THE PROPOSAL ALSO ADVANCES
ADDITIONAL COLLATERAL THAT CAN
RECEIVE A MORE FAVORABLE RISK
WEIGHT.
WE'VE IDENTIFIED A FEW HERE.
INVESTMENT GRADE SECURITIES, IF
THE INSTITUTION HAS A GENERAL
OBLIGATION MUNICIPAL BOND THAT'S
SERVING AS COLLATERAL, THAT CAN
RECEIVE A 20% RISK WEIGHT.
A REVENUE MUNICIPAL BOND COULD
RECEIVE A 50% RISK WEIGHT, AND
A CORPORATE BOND COULD RECEIVE
100% RISK WEIGHT.
IMPORTANTLY, THEY MUST BE
INVESTMENT GRADE AND YOU CAN SEE
THE FOOTNOTE DOWN THERE.
INVESTMENT GRADE ESSENTIALLY
MEANS THAT THE REFERENCED ENTITY
HAS THE ADEQUATE CAPACITY TO
MEET THE FINANCIAL COMMITMENTS
OVER THE PROJECTED LIFE OF THE
ASSETS OR THE EXPOSURE.
ALRIGHT, SO CONTINUING ON WITH
RISK WEIGHTING SUBSTITUTION,
UNDER THE PROPOSAL, A BANK MAY
SUBSTITUTE THE RISK WEIGHT OF AN
ELIGIBLE GUARANTOR FOR THE RISK
WEIGHT OF THE EXPOSURE.
WE'VE IDENTIFIED SOME ELIGIBLE
GUARANTORS THERE.
IT INCLUDES A DEPOSITORY
INSTITUTION OR HOLDING COMPANY,
FEDERAL LOAN BANKS, FARMER MAC
AND AN ENTITY THAT HAS
INVESTMENT GRADE DEBT.
WE PREVIOUSLY DISCUSSED WHAT
INVESTMENT GRADE MEANS.
ELIGIBLE GUARANTEES MUST BE
WRITTEN AND EITHER UNCONDITIONAL
OR A CONTINGENT OBLIGATION OF
THE UNITED STATES GOVERNMENT
OR ITS AGENCIES.
THERE ARE ALSO SOME OTHER
REQUIREMENTS DISCLOSED IN THE
NPR, WHICH WE WOULD ENCOURAGE
YOU TO TAKE A LOOK AT.
OKAY, THAT CONCLUDES MY
DISCUSSION ON RISK WEIGHTING
UNDER THE STANDARDIZED APPROACH
NPR.
PLEASE REFER TO THE APPENDIX
WHICH INCLUDES A COMPLETE LIST
OF QUESTIONS IN THE NPR WHICH IS
CATEGORIZED BY TOPIC.
THANK YOU.
>> Mark Moylan: THANK YOU,
FRANK.
THAT CONCLUDES OUR PRESENTATION
OF THE STANDARDIZED APPROACH
NPR.
THE FDIC WELCOMES WRITTEN
COMMENTS ON THIS NPR.
THE COMMENT PERIOD CLOSES ON
SEPTEMBER 7TH.
AS YOU CAN SEE ON THIS SLIDE,
THERE ARE VARIOUS WAYS IN WHICH
YOU CAN SUBMIT YOUR COMMENTS.
PLEASE NOTE THAT ALL COMMENTS
MUST INCLUDE THE INFORMATION
AT THE BOTTOM OF THE SCREEN.
>> Dan Frye: IF YOU HAVE ANY
QUESTIONS, WE HAVE SCHEDULED
A NATIONAL CONFERENCE CALL FOR
FRIDAY, AUGUST 3RD, AT 1 P.M.
EASTERN TIME.
QUESTIONS SHOULD BE SUBMITTED IN
ADVANCE TO NATIONALCALL@FDIC.GOV
>> Mark Moylan: YOU WILL ALSO
NOTICE THAT WE HAVE PROVIDED
NATIONAL AND REGIONAL POINTS OF
CONTACT.
FOR EACH POINT OF CONTACT,
AN EMAIL ADDRESS AND PHONE
NUMBER HAVE BEEN PROVIDED.
WE CAN ONLY ANSWER QUESTIONS
SEEKING FURTHER CLARIFICATION
OF THE NPRS.
HOWEVER, ALL OF YOUR QUESTIONS
AND CONCERNS ARE IMPORTANT TO US
AND TO THE RULEMAKING PROCESS.
>> Dan Frye: THAT CONCLUDES OUR
PRESENTATION, AND ON BEHALF OF
MARK AND MYSELF, WE THANK YOU
FOR YOUR PARTICIPATION.