(a)Computation. Each asset on the institution's balance sheet and each off-balance-sheet item, adjusted by the appropriate credit conversion factor in § 615.5212, is assigned to one of the risk categories specified in § 615.5211. The aggregate dollar value of the assets in each category is multiplied by the percentage weight assigned to that category. The sum of the weighted dollar values from each of the risk categories comprises “risk-adjusted assets,” the denominator for computation of the permanent capital ratio.
(1) Under the ratings-based approach, a rated position in a securitization (provided it satisfies the criteria specified in paragraph (b)(3) of this section) is assigned to the appropriate risk-weight category based on its external rating.
(2) Provided they satisfy the criteria specified in paragraph (b)(3) of this section, the following positions qualify for the ratings-based approach:
(i) Recourse obligations;
(ii) Direct credit substitutes;
(iii) Residual interests (other than credit-enhancing interest-only strips); and
(iv) Asset-or mortgage-backed securities.
(3) A position specified in paragraph (b)(2) of this section qualifies for a ratings-based approach provided it satisfies the following criteria:
(i) If the position is traded and externally rated, its long-term external rating must be one grade below investment grade or better (e.g., BB or better) or its short-term external rating must be investment grade or better (e.g., A-3, P-3). If the position receives more than one external rating, the lowest rating applies.
(ii) If the position is not traded and is externally rated,
(A) It must be externally rated by more than one NRSRO;
(B) Its long-term external rating must be one grade below investment grade or better (e.g., BB or better) or its short-term external rating must be investment grade or better (e.g., A-3, P-3 or better). If the ratings are different, the lowest rating applies;
(C) The ratings must be publicly available; and
(D) The ratings must be based on the same criteria used to rate traded positions.
(c)Positions in securitizations that do not qualify for a ratings-based approach. The following positions in securitizations do not qualify for a ratings-based approach. They are treated as indicated.
(1) For any residual interest that is not externally rated, the institution must deduct from capital and assets the face amount of the position (dollar-for-dollar reduction).
(2) For any credit-enhancing interest-only strip, the institution must deduct from capital and assets the face amount of the position (dollar-for-dollar reduction).
(3) For any position that has a long-term external rating that is two grades below investment grade or lower (e.g., B or lower) or a short-term external rating that is one grade below investment grade or lower (e.g., B or lower, Not Prime), the institution must deduct from capital and assets the face amount of the position (dollar-for-dollar reduction).
(4) Any recourse obligation or direct credit substitute (e.g., a purchased subordinated security) that is not externally rated is risk weighted using the amount of the recourse obligation or direct credit substitute and the full amount of the assets it supports, i.e., all the more senior positions in the structure. This treatment is subject to the low-level exposure rule set forth in paragraph (e) of this section. This amount is then placed into a risk-weight category according to the obligor or, if relevant, the guarantor or the nature of the collateral.
(5) Any stripped mortgage-backed security or similar instrument, such as an interest-only strip that is not credit-enhancing or a principal-only strip (including such instruments guaranteed by Government-sponsored agencies), is assigned to the 100-percent risk-weight category described in § 615.5211(d)(7).
(d)Senior positions not externally rated. For a position in a securitization that is not externally rated but is senior in all features to a traded position (including collateralization and maturity), an institution may apply a risk weight to the face amount of the senior position based on the traded position's external rating. This section will apply only if the traded position provides substantial credit support for the entire life of the unrated position.
(e)Low-level exposure rule. If the maximum contractual exposure to loss retained or assumed by an institution in connection with a recourse obligation or a direct credit substitute is less than the effective risk-based capital requirement for the credit-enhanced assets, the risk-based capital required under paragraph (c)(4) of this section is limited to the institution's maximum contractual exposure, less any recourse liability account established in accordance with generally accepted accounting principles. This limitation does not apply when an institution provides credit enhancement beyond any contractual obligation to support assets it has sold.
(f)Reservation of authority. The FCA may, on a case-by-case basis, determine the appropriate risk weight for any asset or credit equivalent amount that does not fit wholly within one of the risk categories set forth in § 615.5211 or that imposes risks that are not commensurate with the risk weight otherwise specified in § 615.5211 for the asset or credit equivalent. In addition, the FCA may, on a case-by-case basis, determine the appropriate credit conversion factor for any off-balance sheet item that does not fit wholly within one of the credit conversion factors set forth in § 615.5212 or that imposes risks that are not commensurate with the credit conversion factor otherwise specified in § 615.5212 for the item. In making this determination, the FCA will consider the similarity of the asset or off-balance sheet item to assets or off-balance sheet items explicitly treated in §§ 615.5211 or 615.5212, as well as other relevant factors.