Pt. 327, Subpt. A. App C
Appendix C to Subpart A to Part 327
The concentration score is the higher of the higher-risk assets to Tier 1 capital and reserves score or the growth-adjusted portfolio concentrations score. The concentration score for highly complex institutions is the highest of the higher-risk assets to Tier 1 capital and reserves score, the Top 20 counterparty exposure to Tier 1 capital and reserves score, or the largest counterparty to Tier 1 capital and reserves score. The higher-risk assets to Tier 1 capital and reserve ratio and the growth-adjusted portfolio concentration measure are described below.
A. Higher-Risk Assets/Tier 1 Capital and Reserves
The higher-risk assets to Tier 1 capital and reserves ratio is the sum of the concentrations in each of four risk areas described below and is calculated as:
H is institution i's higher-risk concentration measure and
k is a risk area.1 The four risk areas (k) are defined as:
1 The high-risk concentration ratio is rounded to two decimal points.
• Construction and land development loans (funded and unfunded);
• Leveraged loans (funded and unfunded); 2
2 Unfunded amounts include irrevocable and revocable commitments.
• Nontraditional mortgage loans; and
• Subprime consumer loans.3
3 Each loan concentration category should include purchased credit impaired loans and should exclude the amount recoverable from the U.S. government, its agencies, or government-sponsored agencies, under guarantee or insurance provisions.
The risk areas are defined according to the interagency guidance for a given product with specific modifications made to minimize reporting discrepancies. The definitions for each risk area are as follows:
1. Construction and Land Development Loans: Construction and development loans include construction and land development loans outstanding and unfunded commitments.
2. Leveraged Loans: Leveraged loans include: (1) All commercial loans (funded and unfunded) with an original amount greater than $1 million that meet any one of the conditions below at either origination or renewal, except real estate loans; (2) securities issued by commercial borrowers that meet any one of the conditions below at either origination or renewal, except securities classified as trading book; and (3) and securitizations that are more than 50 percent collateralized by assets that meet any one of the conditions below at either origination or renewal, except securities classified as trading book.4 5
4 The following guidelines should be used to determine the “original amount” of a loan:
(1) For loans drawn down under lines of credit or loan commitments, the “original amount” of the loan is the size of the line of credit or loan commitment when the line of credit or loan commitment was most recently approved, extended, or renewed prior to the report date. However, if the amount currently outstanding as of the report date exceeds this size, the “original amount” is the amount currently outstanding on the report date.
(2) For loan participations and syndications, the “original amount” of the loan participation or syndication is the entire amount of the credit originated by the lead lender.
(3) For all other loans, the “original amount” is the total amount of the loan at origination or the amount currently outstanding as of the report date, whichever is larger.
• Loans or securities where borrower's total or senior debt to trailing twelve-month EBITDA 6 (i.e. operating leverage ratio) is greater than 4 or 3 times, respectively. For purposes of this calculation, the only permitted EBITDA adjustments are those adjustments specifically permitted for that borrower in its credit agreement; or
6 Earnings before interest, taxes, depreciation, and amortization.
• Loans or securities that are designated as highly leveraged transactions (HLT) by syndication agent.7
3. Nontraditional Mortgage Loans: Nontraditional mortgage loans includes all residential loan products that allow the borrower to defer repayment of principal or interest and includes all interest-only products, teaser rate mortgages, and negative amortizing mortgages, with the exception of home equity lines of credit (HELOCs) or reverse mortgages.8 9 10
8 For purposes of this rule making, a teaser-rate mortgage loan is defined as a mortgage with a discounted initial rate where the lender offers a lower rate and lower payments for part of the mortgage term.
10 A mortgage loan is no longer considered a nontraditional mortgage once the teaser rate has expired. An interest only loan is no longer considered nontraditional once the loan begins to amortize.
For purposes of the higher-risk concentration ratio, nontraditional mortgage loans include securitizations where more than 50 percent of the assets backing the securitization meet one or more of the preceding criteria for nontraditional mortgage loans, with the exception of those securities classified as trading book.
4. Subprime Loans: Subprime loans include loans made to borrowers that display one or more of the following credit risk characteristics (excluding subprime loans that are previously included as nontraditional mortgage loans) at origination or upon refinancing, whichever is more recent.
• Two or more 30-day delinquencies in the last 12 months, or one or more 60-day delinquencies in the last 24 months;
• Judgment, foreclosure, repossession, or charge-off in the prior 24 months;
• Bankruptcy in the last 5 years; or
• Debt service-to-income ratio of 50 percent or greater, or otherwise limited ability to cover family living expenses after deducting total monthly debt-service requirements from monthly income.11
Subprime loans also include loans identified by an insured depository institution as subprime loans based upon similar borrower characteristics and securitizations where more than 50 percent of assets backing the securitization meet one or more of the preceding criteria for subprime loans, excluding those securities classified as trading book.
B. Growth-Adjusted Portfolio Concentration Measure
The growth-adjusted concentration measure is the sum of the concentration ratio for each of seven portfolios, adjusted for risk weights and growth. The product of the risk weight and the concentration ratio for each portfolio is first squared and then multiplied by the growth factor for each. The measure is calculated as:
N is institution i's growth-adjusted portfolio concentration measure; 12
12 The growth-adjusted portfolio concentration measure is rounded to two decimal points.
k is a portfolio;
g is a growth factor for institution i's portfolio k; and,
w is a risk weight for portfolio k.
The seven portfolios (k) are defined based on the Call Report/TFR data and they are:
• Construction and land development loans;
• Other commercial real estate loans;
• First-lien residential mortgages and non-agency residential mortgage-backed securities (excludes CMOs, REMICS, CMO and REMIC residuals, and stripped MBS issued by non-U.S. Government issuers for which the collateral consists of MBS issued or guaranteed by U.S. government agencies);
• Closed-end junior liens and home equity lines of credit (HELOCs);
• Commercial and industrial loans;
• Credit card loans; and
• Other consumer loans.13 14
13 All loan concentrations should include the fair value of purchased credit impaired loans.
14 Each loan concentration category should exclude the amount of loans recoverable from the U.S. government, its agencies, or government-sponsored agencies, under guarantee or insurance provisions.
The growth factor, g, is based on a three-year merger-adjusted growth rate for a given portfolio; g ranges from 1 to 1.2 where a 20 percent growth rate equals a factor of 1 and an 80 percent growth rate equals a factor of 1.2.15 For growth rates less than 20 percent, g is 1; for growth rates greater than 80 percent, g is 1.2. For growth rates between 20 percent and 80 percent, the growth factor is calculated as:
15 The growth factor is rounded to two decimal points.
The risk weight for each portfolio reflects relative peak loss rates for banks at the 90th percentile during the 1990-2009 period.16 These loss rates were converted into equivalent risk weights as shown in Table C.1.
16 The risk weights are based on loss rates for each portfolio relative to the loss rate for C&I loans, which is given a risk weight of 1. The peak loss rates were derived as follows. The loss rate for each loan category for each bank with over $5 billion in total assets was calculated for each of the last twenty calendar years (1990-2009). The highest value of the 90th percentile of each loan category over the twenty year period was selected as the peak loss rate.
TABLE C.1—90th Percentile Annual Loss Rates for 1990-2009 Period and Corresponding Risk Weights
||Loss rates(90th percentile)
|Second/Junior Lien Mortgages
|Commercial and Industrial (C&I) Loans
|Construction and Development (C&D) Loans
|Commercial Real Estate Loans, excluding C&D
|Credit Card Loans
|Other Consumer Loans