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From Banking and Finance Law Daily, June 21, 2013

OCC Consolidates Institution Lending Limits; Expands Rule to Include Derivatives

By J. Preston Carter, J.D., LL.M.

The Office of the Comptroller of the Currency has issued a final rule amending its regulation governing lending limits for national banks (12 CFR Part 32) to consolidate the lending limit rules applicable to national banks and savings associations and remove the agency’s separate regulation (12 CFR Part 160.93) governing lending limits for savings associations.

The rule also implements Section 610 of the Dodd-Frank Act, which amends the statutory definition of "loans and extensions of credit" for purposes of the lending limit to include credit exposures arising from derivative transactions, repurchase agreements, reverse repurchase agreements, securities lending transactions, and securities borrowing transactions.

Under the rule, total loans and extensions of credit to a person outstanding at one time cannot exceed 15 percent of the bank's unimpaired capital and surplus if the loan or extension of credit is not fully secured, plus an additional 10 percent of unimpaired capital and surplus if the loan is fully secured. Credit exposures from derivatives deals, repurchase agreements, reverse repurchase agreements, and securities financing transactions are also now included in that limit.

The rule finalizes June 2012 interim final rule (77 Federal Register 37265).

Consolidation of lending limit rules. The OCC received no public comments in response to the amendments included in the interim final rule that integrate savings associations into 12 CFR Part 32. However, it made technical amendments relating to the scope of the final rule with respect to savings associations in order to avoid unintended results.

Dodd-Frank Act. To implement the requirements of Section 610 of the Dodd-Frank Act, the interim final rule amended the definition of “loans and extensions of credit” to include certain credit exposures arising from a derivative transaction or a securities financing transaction. It defined “derivative transaction” to include 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 national banks and savings associations with different options for measuring the credit exposures of derivative transactions and securities financing transactions for purposes of the lending limits rules. According to the OCC, providing these options was intended to reduce regulatory burden, particularly for smaller and mid-size banks and savings associations. All the comment letters received by the OCC addressed the Section 610 amendments.

Scope of rule. Several commenters sought to exempt certain types of transactions from the provisions or, in one case, clarify an exemption for a transaction. However, the OCC declined to amend the interim final rule to change the application of the provisions or to further clarify existing provisions.

Methods to measure credit exposure. In response to comments on the interim final rule, and in order to clarify that an institution may request to use a specific method to measure credit exposure, the interim final rule was amended to provide that the appropriate federal banking agency may, at its discretion, permit a national bank or savings association to use a specific method to calculate credit exposure. Also, this method may apply to all or specific transactions if the agency finds that the method is consistent with safety and soundness considerations.

The final rule retains the use of an internal model for calculating credit exposure for derivative transactions and securities financing transactions. In response to comments, the final rule permits banks to measure credit exposure of securities financing transactions by applying the Basel Collateral Haircut Approach as an additional non-model approach.

Exposures to central counterparties. Under the interim final rule, exposures to central counterparties are credit exposures subject to the lending limits. The OCC did not agree with comments that the lending limits rule should exclude credit exposures to central counterparties or central counterparty guaranty funds, given the concentrated nature of these exposures. However, it did clarify how banks and savings associations must measure counterparty exposures to central counterparties.

Credit derivatives. The OCC received a number of comments on the interim final rule’s treatment of credit exposures arising from credit derivatives. It clarified certain definitions and stated that it could address other issues through OCC interpretations.

The final rule also clarifies certain definitions in the interim final rule regarding securities financing transaction-specific provisions and makes technical changes regarding a few provisions relating to nonconforming loans and extensions of credit.

Under the final rule, which was adopted June 19, 2013, and which finalizes an interim final rule (77 Federal Register 37265, June 21, 2012), a temporary exception period (77 Federal Register 76841, Dec. 31, 2012) is extended for three months, so that compliance with the Section 610 provisions will not be required until Oct. 1, 2013.

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