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Appendix 13E Calculating Risk-Based Capital Ratios 3

(continued )

TABLE 13–28  Risk Weights for Calculating Risk-Weighted Assets for On-Balance-Sheet Items under Basel III

Exposures Risk Weight (in percent)

1. Exposures to sovereigns Exposures to the U.S. government: An exposure to the U.S. government, its central bank, or a U.S. government agency

0

The portion of an exposure that is directly and unconditionally guaranteed by the U.S. government, its central bank, or a U.S. government agency

0

The portion of an exposure that is conditionally guaranteed by the U.S. government, its central bank, or a U.S. government agency

20

Other sovereign exposures: CRC of 0-1 0 CRC of 2 20 CRC of 3 50 CRC of 4-6 100 CRC of 7 150 OECD member with no CRC 0 Non-OECD member with no CRC 100 Sovereign default 150 2. Exposures to certain supranational entities and multilateral development banks (MDBs) An exposure to the BIS, the ECB, the European Commission, the IMF, or an MDB

0

3. Exposures to government-sponsored entities (GSEs) An exposure to a GSE other than an equity exposure or preferred stock 20 An exposure to preferred stock issued by a GSE 100 4. Exposures to depository institutions, foreign banks, and credit unions Exposures to U.S. depository insitutions and credit unions 20 Exposures to foreign banks: CRC of 0-1 20 CRC of 2 50 CRC of 3 100 CRC of 4-7 150 OECD member with no CRC 20 Non-OECD member with no CRC 100 Sovereign default 150 5. Exposures to public-sector entities (PSEs): General obligation exposures to U.S. PSEs 20 Revenue obligation exposures to U.S. PSEs 50 General obligation exposures to non-U.S. PSEs: CRC of 0-1 20 CRC of 2 50 CRC of 3 100 CRC of 4-7 150 OECD member with no CRC 20

Under the Basel III risk-based capital plan, each DI assigns its assets to one of several categories of credit risk exposure. Table 13–28 lists the key categories and assets in these categories.

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4 Appendix 13E Calculating Risk-Based Capital Ratios

Exposures Risk Weight (in percent)

Non-OECD member with no CRC 100 Sovereign default 150 Revenue obligation exposures to non-U.S. PSEs: CRC of 0-1 50 CRC of 2-3 100 CRC of 4-7 150 OECD member with no CRC 50 Non-OECD member with no CRC 100 Sovereign default 150 6. Corporate exposures All corporate exposures, including bonds and loans 100 7. Residential mortgage exposures An exposure to a first-lien residential mortgage with lower risk, or category 1 (mortgage that meets prudential underwriting standards, including standards relating to loan-to-value ratio, are not 90 days or more past due, and that are not restructured or modified)

50

An exposure to a first-lien residential mortgage with higher risk, or category 2 (all other residential mortgage exposures)

100

8. Pre-sold construction loans and statutory multi-family mortgages Exposures to pre-sold construction loans and statutory multi-family mortgage 50 9. High-volatility commercial real estate (HVCRE) An HVCRE exposure 150 10. Past-due exposures An exposure that is not guaranteed or that is unsecured 150 11. Other assets Cash owned and held; gold bullion held in the bank’s own vaults or held in another depository institution’s vaults on an allocated basis, to the extent the gold bullion assets are offset by gold bullion liabilities; and exposures that arise from the settlement of cash transactions

0

Cash items in the process of collection 20 All assets not specifically assigned a different risk weight, including deferred acquisition costs (DAC) and value of business acquired (VOBA)

100

Deferred tax assets (DTAs) arising from temporary differences that the bank could realize through net operating loss carrybacks

100

Portion of mortgage servicing assets (MSAs) and DTAs arising from temporary differences that the bank could not realize through net operating loss carrybakcs that are not deducted from common equity tier 1 capital

250

Source: Federal Register, Vol. 78, No. 198, Office of the Comptroller of the Currency, Department of the Treasury, October 11, 2013.

Risk weights for sovereign exposures are determined using OECD (Organization for Economic Cooperation and Development) country risk classifications (CRCs).20 A sov- ereign is a central government (including the U.S. government) or an agency, department, ministry, or central bank of a central government. The OECD’s CRCs assess a country’s credit risk using two basic components: the country risk assessment model (CRAM)— an econometric model that produces a quantitative assessment of country credit risk— and the qualitative assessment of the CRAM results—which integrates political risk and other risk factors not fully captured by the CRAM. The two components are combined and classified into one of eight risk categories (0–7). Countries assigned to categories 0–1 have the lowest possible risk assessment and are assigned a risk weight of 0 percent,

20. See OECD, “Country Risk Classification,” http://www.oecd.org/trade/topics/export-credits/ arrangement-and-sector-understandings/financing-terms-and-conditions/country-risk-classification/

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