Basel II Capital Accord - Notice of proposed rulemaking (NPR) - Proposed Regulatory Text - Part II

Part II. Qualifying Capital

Section 11. Additional Deductions

(a) General. A [bank] that uses this appendix must make the same deductions from its tier 1 capital and tier 2 capital required in [the general risk-based capital rules], except that:

(1) A [bank] is not required to deduct certain equity investments and CEIOs (as explained in more detail in section 12); and

(2) A [bank] also must make the deductions from capital required by paragraphs (b) and (c) of this section.

(b) Deductions from tier 1 capital. A [bank] must deduct from tier 1 capital any gain-on-sale associated with a securitization exposure as provided in paragraph (a) of section 41 and paragraphs (a)(1), (c), (g)(1), and (h)(1) of section 42.

(c) Deductions from tier 1 and tier 2 capital. A [bank] must deduct the following exposures 50 percent from tier 1 capital and 50 percent from tier 2 capital. If the amount deductible from tier 2 capital exceeds the [bank]�s actual tier 2 capital, however, the [bank] must deduct the shortfall amount from tier 1 capital.

(1) Credit-enhancing interest-only strips (CEIOs). In accordance with paragraphs (a)(1) and (c) of section 42, any CEIO that does not constitute gain-on-sale.

(2) Non-qualifying securitization exposures. In accordance with paragraphs (a)(4) and (c) of section 42, any securitization exposure that does not qualify for the Ratings-Based Approach, Internal Assessment Approach, or the Supervisory Formula Approach under sections 43, 44, and 45, respectively.

(3) Securitizations of non-IRB exposures. In accordance with paragraphs (c) and (g)(3) of section 42, certain exposures to a securitization any underlying exposure of which is not a wholesale exposure, retail exposure, securitization exposure, or equity exposure.

(4) Low-rated securitization exposures. In accordance with section 43 and paragraph (c) of section 42, any securitization exposure that qualifies for and must be deducted under the Ratings-Based Approach.

(5) High-risk securitization exposures subject to the Supervisory Formula Approach. In accordance with paragraph (b) of section 45 and paragraph (c) of section 42, any securitization exposure that qualifies for the Supervisory Formula Approach and has a risk weight equal to 1,250 percent as calculated under the Supervisory Formula Approach.

(6) Eligible credit reserves shortfall. In accordance with paragraph (a)(1) of section 13, any eligible credit reserves shortfall.

(7) Certain failed capital markets transactions. In accordance with paragraph (e)(3) of section 35, the [bank]�s exposure on certain failed capital markets transactions.

Section 12. Deductions and Limitations Not Required

(a) Deduction of CEIOs. A [bank] is not required to make the deductions from capital for CEIOs in 12 CFR part 3, Appendix A, � 2(c) (for national banks), 12 CFR part 208, Appendix A, � II.B.1.e. (for state member banks), 12 CFR part 225, Appendix A, � II.B.1.e. (for bank holding companies), 12 CFR part 325, Appendix A, � II.B.5. (for state nonmember banks), and 12 CFR 567.5(a)(2)(iii) and 567.12(e) (for savings associations).

(b) Deduction of certain equity investments. A [bank] is not required to make the deductions from capital for nonfinancial equity investments in 12 CFR part 3, Appendix A, � 2(c) (for national banks), 12 CFR part 208, Appendix A, � II.B.5. (for state member banks), 12 CFR part 225, Appendix A, � II.B.5. (for bank holding companies), and 12 CFR part 325, Appendix A, � II.B. (for state nonmember banks).

Section 13. Eligible Credit Reserves

(a) Comparison of eligible credit reserves to expected credit losses - (1) Shortfall of eligible credit reserves. If a [bank]�s eligible credit reserves are less than the [bank]�s total expected credit losses, the [bank] must deduct the shortfall amount 50 percent from tier 1 capital and 50 percent from tier 2 capital. If the amount deductible from tier 2 capital exceeds the [bank]�s actual tier 2 capital, the [bank] must deduct the excess amount from tier 1 capital.

(2) Excess eligible credit reserves. If a [bank]�s eligible credit reserves exceed the [bank]�s total expected credit losses, the [bank] may include the excess amount in tier 2 capital to the extent that the excess amount does not exceed 0.6 percent of the [bank]�s credit-risk-weighted assets.

(b) Treatment of allowance for loan and lease losses. Regardless of any provision to the contrary in [general risk-based capital rules], ALLL is included in tier 2 capital only to the extent provided in paragraph (a)(2) of this section and paragraph (b) of section 23.