The Office of the Comptroller of the Currency (OCC) has issued an interim final rule that amends its lending limits rule, 12 CFR 32, to implement section 610 of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, P.L. 111–203 (Dodd–Frank Act). Section 610 revises the lending limits statute, 12 USC 84, to include credit exposures arising from derivative transactions and repurchase agreements, reverse repurchase agreements, securities lending transactions, and securities borrowing transactions (collectively, securities financing transactions). This interim final rule also consolidates the lending limits rules applicable to national banks and federal and state savings associations (collectively, banks) by adding savings associations to part 32 and removing 12 CFR 160.93. In so doing, the rule preserves certain statutory exceptions to the lending limits that are unique to savings associations.

To reduce the burden of the new credit exposure calculations for derivatives and securities financing transactions, particularly for smaller and midsize banks and savings associations, the interim final rule provides options for measuring the exposures for each transaction type. These options permit institutions to adopt compliance alternatives that fit their size and risk management requirements, consistent with safety and soundness and the goals of the statute.  However, the OCC may require a particular bank to use one of these options for safety and soundness reasons.

• Specifically, banks can choose to measure the credit exposure of derivatives (except credit derivatives) in one of three ways: (1) through an OCC-approved internal model, (2)  by use of a look-up table that fixes the attributable exposure at the execution of the transaction, or (3) by use of a look-up table that incorporates the current mark to market and a fixed add-on for each year of the transaction’s remaining life. For credit derivatives (transactions in which banks buy or sell credit protection against loss on a third-party reference entity), the interim final rule provides a special rule for calculating credit exposure, based on exposure to the counterparty and reference entity. With respect to securities financing transactions, institutions can choose to use either an OCC-approved internal model or fix the attributable exposure based on the type of transaction (repurchase agreement, reverse repurchase agreement, securities lending transaction, or securities borrowing transaction).
• The interim final rule also specifically exempts securities financing transactions relating to Type I securities (U.S. or state government obligations, etc.) from the lending limits calculations.

The revised lending limits rule continues to provide that all loans and extensions of credit, including those that arise from derivative transactions and securities financing transactions, must be consistent with safe and sound banking practices.

The interim final rule is effective on July 21, 2012. The OCC, however, recognizes that national banks and savings associations will need time to conform their operations to the amendments implementing section 610 as applied by the OCC. The interim final rule, therefore, includes a temporary exception from the lending limit rules for extensions of credit arising from derivative transactions or securities financing transactions, until January 1, 2013.

As of July 21, 2012, the OCC is rescinding the former Office of Thrift Supervisions Examination Handbook Section 211, “Loans to One Borrower,” and the related examination program because they will be outdated. The OCC also is rescinding CEO Memo 246, “Changes to Loans to Borrower Limitation,” because the interim final rule incorporates the provisions described therein. The OCC may issue guidance for banks on lending limits at a later date. Until then, these institutions should rely on 12 CFR 32, as amended by this interim final rule.

Questions or requests for further information may be directed to Jonathan Fink, Assistant Director, Bank Activities and Structure Division, (202) 874-5300; Heidi M. Thomas, Special Counsel, Legislative and Regulatory Activities Division, (202) 874-5090; or Kurt Wilhelm, Director for Financial Markets, (202) 874-4479.

Julie L. Williams
First Senior Deputy Comptroller and Chief Counsel

Related Link

• Interim Final Rule (PDF)