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

Attention: Chief Executive Officers and Chief Financial Officers



The Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision have published a final rule that changes their regulatory capital standards to address the treatment of recourse obligations, residual interests, and direct credit substitutes that expose banks, bank holding companies, and thrifts to credit risk. The final rule, published in the Federal Register on November 29, 2001, synthesizes the capital treatment outlined in two notices of proposed rulemakings issued in 2000 - "Recourse and Direct Credit Substitutes" and "Residual Interests in Asset Securitizatioin or Other Transfers of Financial Assets."

The final rule treats recourse obligations and direct credit substitutes more consistently than the agencies' current risk-based capital standards and introduces a credit ratings-based approach to assigning risk weights within a securitization. The final rule also imposes a "dollar-for-dollar" capital charge on residual interests and a concentration limit on credit-enhancing interest-only strips, a subset of residual interests.

Effective Date: The rule is effective on January 1, 2002. Any transactions settled on or after January 1, 2002, are subject to this final rule. Banking organizations that enter into transactions before January 1, 2002, may elect early adoption, as of November 29, 2001, of any provision of the final rule that results in a reduced capital requirement.

Additional Information: For further information, contact Thomas R. Boemio, Senior Supervisory Financial Analyst, (202) 452-2987, or Barbara Bouchard, Assistant Director, (202) 452- 3072, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW, Washington, DC 20551.

Attachments: Looking for Circular Letter 5554, Proposed Revisions to Regulation Z Commentary.