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Circular Letters

Circular Letter 5631

July 28, 2004

To: All Member Banks and Others Concerned in the Third Federal Reserve District

Attention: Chief Executive Officer and Chief Financial Officer

Subject: CAPITAL REQUIREMENTS FOR ASSET-BACKED COMMERCIAL PAPER PROGRAMS: FINAL RULE

Summary:

The Board of Governors of the Federal Reserve System and the other federal financial institutions supervisory agencies have issued a final rule amending their risk-based capital standards. The rule permits sponsoring banks, bank holding companies, and thrifts (banking organizations) to continue to exclude from their risk-weighted asset base for purposes of calculating the risk-based capital ratios asset-backed commercial paper (ABCP) program assets that are consolidated onto sponsoring banking organizations’ balance sheets as a result of Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, as revised (FIN 46-R). This provision of the final rule will make permanent an existing interim final rule.

The final rule also requires banking organizations to hold risk-based capital against eligible ABCP liquidity facilities with an original maturity of one year or less that provide liquidity support to ABCP by imposing a 10 percent credit conversion factor on such facilities. Eligible ABCP liquidity facilities with an original maturity exceeding one year remain subject to the current 50 percent credit conversion factor. Ineligible liquidity facilities are treated as direct credit substitutes or recourse obligations and are subject to a 100 percent credit conversion factor. The resulting credit equivalent amount is then risk weighted according to the underlying assets, after consideration of any collateral, guarantees, or external ratings, if applicable. All liquidity facilities that provide liquidity support to ABCP will be treated as eligible liquidity facilities for a one-year transition period.

The Federal Register notice, published July 28, 2004, is available here PDF Icon (579 KB, 51 pages).

Date: The rule will become effective on September 30, 2004.

For Further Information: Thomas R. Boemio, Senior Project Manager, Policy, (202) 452-2982, David Kerns, Supervisory Financial Analyst, (202) 452-2428, Barbara Bouchard, Deputy Associate Director, (202) 452-3072, Division of Banking Supervision and Regulation; or Mark E. Van Der Weide, Senior Counsel, (202) 452-2263, Legal Division. For users of Telecommunications Device for the Deaf (“TDD”) only, contact (202) 263-4869.