Alert June 26, 2012

OCC Issues Interim Final Rule on Lending Limit, Which Implements Section 610 of Dodd-Frank Act and Applies to Certain Exposures Related to Derivatives Transactions and Securities Financing Transactions

The OCC adopted an interim final rule (the “Interim Final Rule”) that implements Section 610 of the Dodd-Frank Act (“Section 610”) and expands the statutory definition of “loans and extensions of credit” for the consolidated lending limit rule which will be applicable to national banks and federal and state-chartered savings associations.  The Interim Final Rule eliminates the OCC’s separate lending limit regulation for savings associations.  In general, a national bank’s or savings association’s extensions of credit to a single borrower are limited to 15% of the institution’s unimpaired capital and surplus, if unsecured and 25% of unimpaired capital and surplus, if fully secured.  State-chartered banks (but not state-chartered savings associations) are subject to separate lending restrictions under Section 611 of the Dodd-Frank Act.

The definition of “loans and extensions of credit under Section 610 and the Interim Final Rule includes any exposure to a person arising from a derivative transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction, or securities borrower transaction.”  Section 610 and the Interim Final Rule also add a definition of “derivative transaction” that includes any transaction that is a contract, agreement, swap, warrant, note, or option that is based, in whole or in part, on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities, securities, currencies, interest or other rates, indices, or other assets.

The Interim Final Rule provides three methods for calculating credit exposure of derivative transactions other than credit derivatives.   A national bank or savings association, however, must use the same method for calculating credit exposure from all of its non-credit derivative transactions.  As outlined in the Explanatory Table provided in the Interim Final Rule, the three methods include: (1) an internal model method; (2) a conversion factor matrix method; and (3) a remaining maturity method.  National banks and savings associations are expected to use compliance methods that fit their size and risk management requirements and that do not raise safety and soundness concerns.  Although a national bank or savings association may choose its own method, federal banking agencies may require a national bank or savings association to use a particular method if it finds that such method is necessary to promote the safety and soundness of the bank or savings association. 

The Interim Final Rule is effective July 21, 2012, and comments on the Interim Final Rule will be accepted until August 6, 2012. The OCC recognized, however, that national banks and savings associations will need time to conform their operations to the amendments implementing Section 610.  Accordingly, the Interim Final Rule, includes a temporary exception from the lending limit rule until January 1, 2013 for extensions of credit arising from derivative transactions or securities financing transactions.