Board of Governors of the Federal Reserve System

Data Dictionary

Item Number 6603

Call confidentiality applies to FFIEC 031/041.

Data Description:

Includes the principal amount outstanding of asset sales with recourse to the extent such amounts are not included on the balance sheet, including the principal amount outstanding of 1-4 family rsidential mortgages that have been pooled and transferred with recourse to the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). Moreover, the principal amount of the transfer with recourse of pooled 1-4 family residential mortgages to private third parties is included only to the extent that such amounts are not included on the balance sheet.

A bank holding company that transfers small business loans and leases on personal property (small business obligations) with recourse in a transaction that qualifies as a sale under generally accepted accounting principles (GAAP) must maintain risk-based capital only against the amount of recourse retained, provided the institution established a recourse liability account that is sufficient under GAAP. Only loans and leases to businesses that meet the criteria for a small business concern established by the Small Business Administration under Section 3(c) of the Small Business Act (12 U.S.C. 631) are eligible for this favorable risk-based capital treatment. When reporting eligible transfers with recourse in this item, only the amount of retained recourse is reported in the appropriate risk weight category. This amount will normally be accorded a 100 percent risk weight.

The Federal Reserve's risk-based capital standards provide that the amount of risk-based capital that must be maintained for assets transferred with recourse should not exceed the maximum amount of recourse fr which a bank holding company is contractually liable under   the recourse agreement. This rule, known as the low level recourse rule, applies to transactions accounted for as sales under generally accepted accounting principles (GAAP) in which a bank holding company contractually limits its risk of loss or recourse exposure to less than the full effective minimum risk-based capital requirement for the   assets transferred--generally, four percent for qualifying first liens 1 to 4 family residential mortgages and eight percent for most other assets. Low level recourse transaction may arise when a bank holding company sells or securitizes assets and:

Uses contractual cash flows (e.g., interest-only strips receivable and so-called "spread accounts"), retained subordinated interests, retained securities (e.g., collateral invested amounts or cash collateral accounts), or other assets as credit enhancements. When a credit enhancement is carried as an asset on the bank holding company's balance sheet in accordance with GAAP and the low level recourse rule applies, the on balance-sheet asset amount of the credit   enhancement should be reported in the zero risk weight category on Schedule HC-I, Part I, in the appropriate asset category. The "maximum contractual dollar amount of recourse exposure" for this transaction is this on-balance-sheet asset amount on a net of tax basis, when appropriate.

OR

Provides limited recourse to purchasers of the assets sold, but does not use on-balance-sheet assets as credit enhancements. In this situation, the "maximum contractual dollar amount of recourse exposure" for a transaction is the maximum contractual amount of the bank holding company's recourse exposure as ofthe report date, less the balance in any associated recouse liability account established in accordance with GAAP and reported in Schedule HC, item 23, "Other liabilities."

For bank holding companies that have entered into low level recourse transactions should report these transactions in Schedule HC-I using either the "direct reduction method" or the "gross-up method" in accordance with the following guidance. When using the gross-up method, a bank holding company includes an amount in its risk-weighted   assets (the denominator of its risk-based capital ratios) for its "maximum contractual dollar amount of recourse exposure" that is calculated under the assumption that the bank holding company's total risk-based capital ratio equals the 8 percent minimum requirement. In contrast, when usingthe direct reduction method, a bank holding company includes an institution-specific amount in its risk-weighted assets for its "maximum contractual dollar amount of recourse exposure" that is calculated using the actual amount of the bank holding company's total risk-based capital. This institution-specific calculation produces the effect of directly reducing Tier 1 and total risk-based capital by the "maximum contractual dollar amount of recourse exposure" without lowering the bank holding company's Tier 1 leverage capital ratio. For a bank holding company whose risk-based capital ratios exceed the required minimums, it is normally preferable to use the direct reduction method.

If the bank holding company chooses to use the direct reduction method, the "maximum contractual dollar amount of recourse exposure," as defined above, shouldbe reported in Schedule HC-I, Part I, memorandum item 8, (1727). In addition, the bank holding company should report as a credit equivalent amount in this item (Schedule HC-I, Part II, item 4 (6603) in the 100% risk weight category an "institution-specific add-on factor" for its low level recourse exposure. The amount of this factor also should be included in the "net risk-weighted assets" that the bank holding company reports in Schedule HC-I, Part III, item 3 (A223). The "institution-specific add-on factor," which is independent of the risk weight category of the assets to which the recourse applies.

If the bank holding company chooses to use the gross-up method, the "maximum contractual dollar amount of recourse exposure" for a transaction, as defined above, should be multiplied by a factor of 12.5, 25, or 62.5 according to whether the assets shold would be assigned to the 100 percent, 50 percent, or 20 percent risk weight category, respectively. The resulting dollar amount should be reported as an off-balance-sheet credit equivalent amount in this item (Schedule HC-I, Part II, item 4 (6603) in the appropriate risk weight category of the assets sold.

For example, a bank holding company has sold $2 million in first lien residential mortgages subject to two percent recourse under a U.S. Government program and properly reports the transaction as a sale. The bank holding company has removed the $2 million in mortgages from its balance sheet and, in accordance with GAAP, has also established a recourse liability account with a balance of $10,000. The maximum amount for which the bank holding company is liable is $40,000. The mortgages are accorded a 50 percent risk weight and the bank holding company's recourse exposure is less than the $80,000 minimum risk-based capital requirement for these assets sold with recourse. Thus, the low level recourse rule applies. The "maximum contractual dollar amount of recourse exposure" for this transaction is $30,000, the $40,000 maximum contractual amount of the bank holding company's recourse exposure as of the report date, less the $10,000 balance of the recourse liability account for this transaction. The bank holding company's total risk-based capital is $10.5 million and it has net risk-weighted assets excluding this low level recourse exposure of $100 million.

If the bank holding company chooses touse the direct reductionmethod,the bank holding company would report $30,000--its "maximum contractual dollar amount of recourse exposure"--in Schedule HC-I, Part I, memorandum item 8 (1727) and would use this amount to calculate its institution-specific add-on factor using the the formula provided above. Based on the facts in the example, the bank holding company calculates that its institution-specific add-on factor is $286,533. The bank holding company would report the amount of this add-on factor as a credit equivalent amount in this item (Schedule HC-I, Part II, item 4 (6603) in the 100% risk weight category, and also include this amount in the "net risk-weighted assets" that is reports in Schedule HC-I, Part III, item 3 (A223).

If the bank holding company chooses to use the gross-up method, the bank holding company would report $750,000 as a credit equivalent amount in this item in the 50% risk weight category ($30,000--its "maximum contractual dollar amount of recourse exposure"--multiplied ty 25--the factor for assets that qualify for a 50 percent risk weight). Because the $2 million in mortgages sold have been removed from the balance sheet, the difference between the $750,000 credit equivalent amount and the $2 million is not reported in Schedule HC-I. In addition, because the $750,000 credit equivalent is assigned to the 50 percent rist category, the bank holding company would include $375,000 ($750,000 multiplied by 50 percent) in the "net risk-weighted   assets" that it reports in Schedule HC-I, Part III, item 3 (A223).

The mnemonic prefixes for the risk weight columns represents the following:

BHC0 = (Column A) 0%

BHC2 = (Column B) 20%

BHC5 = (Column C) 50%

BHC9 = (Column D) 100%

For an detailed description of the broad categories of transactions that are assigned to each risk weight category (columns A through D) established by the Risk-Based Guidelines, see the Instructions for Preparation of Reporting Form FR Y-9C Schedule HC-I. If a bank holding company has not established the systems to determine the risk weight(s) applicable for a transaction, it has the option of risk-weighting that transaction at 100%.

NOTE:

Reported in Schedule HC-I, Part II, only by the top-tier bank holding companies with consolidated assets of $150 million or more for the FR Y-9C report.