The OCC adopted a final rule (the “Final Rule”) that implements Section 610 of the Dodd-Frank Act (“Section 610”), amends 12 C.F.R., part 32 of the OCC’s regulations, 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. An interim final rule (the “Interim Final Rule”) implementing Section 610 was previously adopted by the OCC and was discussed in the June 26, 2012 Financial Services Alert. The Final Rule largely retains the substance of the Interim Final Rule, but makes a significant number of technical changes. The Final Rule completes the elimination of 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 Final Rule includes any exposure to a person arising from a derivative transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction, or securities borrowing transaction.” Section 610 and the 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 Final Rule provides three methods for calculating the credit exposure of derivative transactions other than credit derivatives. As outlined in the Explanatory Table provided in the Final Rule, the three methods are: (1) a model method; (2) a conversion factor matrix method; and (3) a current exposure method (which, to a certain extent, takes into account the effects of netting and collateral). The Final Rule also provides three methods for calculating credit exposure arising from securities financing transactions. The three methods are: (a) a model method; (b) a basic method; and (3) a collateral haircut approach (which reflects the effects of netting and collateral).
Under the Final Rule, a national bank or savings association (each referred to in this paragraph as a ”Bank”) may choose which method of calculating credit exposure it will use unless the Bank’s federal banking regulatory agency requires it to use a specific method for safety and soundness purposes. In a change from the Interim Final Rule, the Final Rule does not require a Bank to use one method for calculating credit exposure arising from all derivative transactions as well as credit exposure arising from all securities financing transactions, but instead allows the Bank’s federal banking regulatory agency to permit the Bank, subject to safety and soundness concerns, to use a specific method to calculate credit exposure and to apply it to all or to specific transactions.
The compliance date for the Final Rule is October 1, 2013, which represents a three-month extension from the July 1, 2013 compliance deadline originally set by the Interim Final Rule.