Alert July 08, 2008

OCC Issues Interpretive Letter Jointly with FRB Providing Guidance on Risk-Based Capital Charges for Liquidity Facilities that Support ABCP Conduits

The OCC issued an interpretive letter (“Letter #1098”) jointly with the FRB (and after consulting with the staffs of the OTS and the FDIC) providing guidance on the risk-based capital charges for liquidity facilities that support asset-based commercial paper (“ABPC”) conduits.  Letter #1098 responds to a series of questions from the American Securitization Forum (“ASF”), on behalf of ASF’s bank members.  The responses are important to the design and operation of banks’ securitization programs.

Specifically, the OCC and FRB conclude in Letter #1098 that:

  1. For risk-based capital purposes, external ratings issued by a Nationally Recognized Statistical Rating Organization (“NRSRO”) must be published in an accessible public form and monitored by the NRSRO.  Private ratings do not qualify as external ratings for purposes of determining eligibility for liquidity facilities that support ABCP conduit assets. 
  2. In determining the eligibility of a privately rated or unrated ABCP liquidity facility, a bank may look through to the underlying assets if aging analysis and information on the relevant credit enhancements are available.  A bank may apply the eligibility exception for government-guaranteed assets to conduit assets that are backed by qualifying government-guaranteed assets (e.g., those that are guaranteed by the U.S. government, its agencies, or by central governments of countries that are members of the Organization for Economic Cooperation and Development.)
  3. The federal banking agencies are continuing to consider how to apply the risk-based capital rules and the ABCP guidance to assets in a conduit that have no firm maturity and that are not externally rated.