3 CCR 701-6
DEPARTMENT OF REGULATORY AGENCIES Division of Banking TRUST COMPANIES 3 CCR 701-6 [Editor’s Notes follow the text of the rules at the end of this CCR Document.] TC4 Assessments and Fees [Section 11-109-303, C.R.S.] (Repealed and recodified in 3 CCR 701-10 AR16)
TC5 Investment in Small Business Investment Companies [Section 11-109-902, C.R.S] A. Shares of stock in small business investment companies organized under the Small Business Investment Act of 1958, 15 USC 661 et seq., administered by the Small Business Administration, shall be eligible for purchase by trust companies to the extent that banks subject to the laws of the federal government are permitted to do so, and to the extent permitted by the Rules of the Banking Board but in no event shall any trust company hold shares in an amount aggregating more than three percent of the trust company's total capital.
B. Reference 1. 15 USC 661 et seq., effective March 2, 2006.
2. This Rule does not include amendments to or editions of the referenced material later than March 2, 2006.
3. For more detailed information pertaining to these provisions, please contact the Secretary to the Colorado State Banking Board at 1560 Broadway, Suite 1175, Denver, Colorado 80202, 303-894-7584.
TC6 Collateralization of Deposits [Section 11-109-104, C.R.S.] A. On or after December 31, 1990, no trust company shall accept or hold savings deposits, time deposits, or certificates of deposit pursuant to Section 11-109-201 (1)(d), C.R.S., unless such deposits are insured by the Federal Deposit Insurance Corporation (FDIC) or its successor. A trust company is not authorized to receive and maintain transaction deposit accounts pursuant to Section 11-109-201(2), C.R.S.
TC7 Generally Accepted Accounting Principles [Section 11-109-402, C.R.S.] A. Generally accepted accounting principles (GAAP) as defined in this Rule shall consist of those opinions and statements generally recognized and supported by the Accounting Principles Board (APB) or the Financial Accounting Standards Board (FASB).
B. While it is the Banking Board's intention to require that GAAP be followed whenever appropriate, certain statements filed by trust companies with various state and federal regulatory agencies are supervisory and regulatory documents, not primarily accounting documents. Because of the special supervisory, regulatory, and economic policy needs of trust company reports, the instructions do not always follow GAAP. In reporting transactions not covered in principle by regulatory instructions, trust companies may follow GAAP. However, in such circumstances, unless the trust company has already obtained a ruling from another regulatory agency pursuant to the policies expressed in Section 11-101-102, C.R.S., a specific ruling shall be sought promptly from the Banking Board.
C. References: GAAP are issued by the FASB which is an arm of the Financial Accounting Foundation, an independently chartered institution. The APB is a committee of the American Institute of Certified Public Accountants. This Rule does not include amendments to or editions of the referenced material later than the effective date of this Rule. For more detailed information pertaining to this Rule, please contact the Secretary to the Colorado State Banking Board at 1560 Broadway, Suite 1175, Denver, Colorado 80202, (303) 894-7584. TC8 Dividends [Section 11-109-501, C.R.S.] A. Purpose This Rule applies restrictions to the declaration and payment of dividends by a state chartered trust company.
B. Definitions For the purposes of this Rule, the following definitions apply:
1. Capital surplus means the total of surplus as reportable in the trust company's Report of Condition and Income and surplus on perpetual preferred stock.
2. Retained net income means the net income of a specified period less the total amount of all dividends declared in that period.
C. Earnings Limitation on Payment of Dividends Unless the dividend is approved by the Banking Board, a trust company shall not declare a dividend if the total amount of all dividends, including the proposed dividend, declared by such trust company in any calendar year exceeds the total of the trust company's retained net income of that year to date, combined with its retained net income of the preceding two years. The trust company's net income during the current year and its retained net income from the prior two calendar years is reduced by any net losses incurred in the current or prior two years, and any required transfers to surplus or to a fund for the retirement of preferred stock.
D. Date of Declaration of Dividend The trust company shall use the date a dividend is declared for the purposes of determining compliance with this Rule.
TC9 Investment Limitations [Section 11-109-902(5), C.R.S.] A. A trust company may, for its own account, purchase Type I securities in an unlimited amount, subject to the exercise of prudent judgment.
B. A trust company may, for its own account, purchase Type II, III, IV, and V securities, as described in 12 CFR Part 1, subject to the following restrictions:
1. Obligations of any issuer may be purchased up to a limit of 15 percent of the trust company's total capital provided that the purchase is based on adequate evidence of the maker's ability to perform, 2. Obligations of issuers having a maturity date of less than five (5) years may be purchased not to exceed 10 percent of the total capital, provided that the purchase is based on adequate evidence of the maker's ability to perform. This limitation shall be separate from and in addition to the limitation contained in Paragraph (B)(1).
3. The limitations prescribed in Paragraph (B)(1) and/or Paragraph (B)(2) of this Rule are reduced to 5 percent of total capital when purchase judgment is predicated on reliable estimates as described in 12 CFR Part 1.
4. Every trust company shall maintain in its files credit information adequate to demonstrate that it exercised prudence in its decision to purchase and to retain any security in its investment portfolio. Failure to maintain such information could result in the determination that the security is not a permissible trust company investment.
C. Reference 1. 12 CFR Part 1 was issued by the Comptroller of Currency effective December 2, 1996.
2. This Rule does not include amendments to or editions of the referenced material later than December 2, 1996. A copy of 12 CFR Part 1 may be examined at any State Publications Depository.
3. For more detailed information pertaining to these provisions, please contact the Secretary to the Colorado State Banking Board at 1560 Broadway, Suite 1175, Denver, Colorado 80202, 303-894-7584.
TC10 Reports of New Executive Officers, Directors, and Persons in Control and Related Late Filing Penalty [Section 11-109-402(5) and (6), C.R.S.] A. Any person who becomes an executive officer, director, or person responsible, directly or indirectly, for the management, control, or operation of a trust company, must notify the Division of Banking in writing within ninety (90) days thereafter.
The written notice must include a statement describing any civil or criminal offenses of which such person has been found guilty or liable by any federal or state court or federal or state regulatory agency.
B. In addition, any person who becomes an executive officer, director, or person responsible, directly or indirectly, for the management, control, or operation of a trust company, must file a biographical report with the Division within ninety (90) days thereafter, if:
1. The trust company has been chartered less than two (2) years;
2. Within the preceding two (2) years, the trust company has undergone a change in control that required a notice to be filed pursuant to Section 11-109-401(2), C.R.S.;
3. Within the preceding two (2) years, the holding company became a registered holding company, unless the holding company is owned or controlled by a registered holding company, or the holding company was established in a reorganization in which substantially all of the shareholders of the holding company were shareholders of the trust company prior to the holding company's formation; or 4. The trust company or holding company is not in compliance with all minimum capital requirements applicable to the institution as determined on the basis of the institution's most recent report of condition, examination, or is otherwise in a troubled condition as indicated by a composite rating of 3, 4, or 5 at the institution's most recent examination by a state or federal banking regulator.
The biographical report to be filed with the Division of Banking may be either on the form provided by the Division of Banking or the form filed with the institution's federal regulator for reporting the change of executive officer, director, or person in control.
C. For the purposes of this Rule, except as provided in Paragraph (D), the term "director" does not include an advisory director who:
1. Is not elected by the shareholders of the trust company;
2. Is not authorized to vote on any matters before the board of directors; and 3. Provides solely general policy advice to the board of directors.
D. The Banking Board or the Division of Banking may otherwise determine that additional reporting is required of any person who becomes an executive officer, director, or person in control. Written notice will be provided by the Division of Banking to such person of any additional requirements.
E. The Banking Board may assess a $25.00 per day penalty for late filing of reports of new executive officers, directors, and persons in control that are required by Section 11-109-402(5) and (6), C.R.S., and this Rule. Said penalty may be waived by the Banking Board pursuant to statute. Filing of an incorrect report form is not grounds for the waiving of the penalty. TC11 Scope of Directors' Examinations [Section 11-109-402(2), C.R.S.] A. Definitions For the purposes of this Rule, the term “reviewer” shall mean such public accountant or other independent person(s) as determined by the Banking Board.
B. Examination Scope For the purposes of Section 11-109-402(2), C.R.S., a trust company (institution), at a minimum , shall perform annually the procedures as set forth in Appendix A as the scope of a directors' examination. The recommended procedures are intended to address the high risk areas common to all financial institutions. However, each institution must review its own particular business and determine if additional procedures are required to cover other high risk areas. The reviewer shall be informed of, and permitted access to, all examination reports, administrative orders, and any additional communications between the institution and the Division of Banking, including the Colorado State Banking Board, as well as the appropriate federal regulatory agency. The reviewer shall obtain the institution management's written representation that he or she has been informed of, and granted access to, all such documents prior to completion of the field work.
C. Extent of Testing Where the procedures set forth in Appendix A require testing or determinations to be made, sampling may be used. Both judgmental and statistical sampling may be acceptable methods of selecting samples to test. Sample sizes should be consistent with generally accepted auditing standards, or as agreed upon by the reviewer and the client institution. In any event, the sampling method and extent of testing, including the sample size(s) used, shall be disclosed in the directors' examination report.
D. Reports to be Filed with the Division of Banking After the completion of the procedures, or agreed-upon procedures, set forth in Appendix A, the independent reviewer shall evaluate the results of his audit work and promptly prepare and submit a report addressed to the board of directors of the institution. The report shall detail the findings and suggestions resulting from performance of the auditing procedures. Independent reviewers shall include in the report, at a minimum:
1. Financial statements (balance sheet and statement of earnings as of the examination date).
2. The accounts or items on which the procedures were applied.
3. The sampling methods used.
4. The procedures and agreed-upon extent of testing performed.
5. The accounting basis, either generally accepted accounting principles (GAAP) or regulatory required accounting, on which the accounts or items being audited are reported.
6. The reviewer's findings.
7. The as of date that the procedures were performed.
The reviewer shall sign and date the report. The report shall also disclose the reviewer's business address.
The institution must send a copy of the report, the engagement letter, and any management letter or similar letter of recommendation to the Division of Banking and, if applicable, to the appropriate federal regulators within thirty (30) days after its receipt, but no later than one hundred fifty (150) days after the date of examination. In addition, each institution shall promptly notify the Division of Banking when a reviewer is engaged to perform a directors' examination and when a change in its reviewer occurs.
E. References Generally accepted accounting principles are issued by the Financial Accounting Standard Board which is an arm of the Financial Accounting Foundation, an independently chartered institution. Section 23A of the Federal Reserve Act, also known as 12 USC 371c, is a law enacted by the United States Congress and administered by the Board of Governors of the Federal Reserve System.
Regulation O of the Board of Governors of the Federal Reserve System, also known as 12 CFR 215, is a regulation enacted by the Federal Reserve Board under the authority granted by the United States Congress and administered by the Board of Governors of the Federal Reserve System.
This Rule does not include amendments to or editions of the referenced materials later than the effective date of the Rule, October 24, 1990.
For more detailed information pertaining to this Rule, please contact the secretary to the Colorado State Banking Board at 1560 Broadway, Suite 1175, Denver, CO 80202, 303-894-7584. APPENDIX A - TC11 For the purpose of Section 11-109-402(2), C.R.S., a trust company (institution), at a minimum, shall have the following procedures performed annually.
A. Securities 1. Review the investment policies and procedures established by the institution's board of directors. Review the board of directors', or investment committee, minutes for evidence that the policies and procedures are periodically reviewed and approved. The policies and procedures should include, but not be limited to:
a. Investment objectives, including use of “available for sale,” "held for sale" and trading activities;
b. Permissible types of investments;
c. Diversification guidelines to prevent undue concentration;
d. Maturity schedules;
e. Limitation on quality ratings;
f. Hedging activities and other uses of futures, forwards, options, and other financial instruments;
g. Handling exceptions to standard policies;
h. Valuation procedures and frequency;
i. Limitations on the investment authority of officers; AND j. Frequency of periodic reports to the board of directors on securities holdings.
2. Test the investment procedures and ascertain whether information reported to the board of directors, or investment committee, for securities transactions is in agreement with the supporting data by comparing the following information on such reports to the trade tickets for a sample of items, including futures, forwards, and options:
a. Descriptions;
b. Interest rate;
c. Maturity;
d. Par value, or number of shares;
e. Cost; and f. Market value on date of transaction, if different than cost.
3. Using the same sample items, analyze the securities register for accuracy and confirm the existence of the sample items by examining securities physically held in the institution and confirming the safekeeping of those securities held by others.
4. Balance investment subledger(s) or reconcile computer-generated trial balances with the general ledger control accounts for each type of security.
5. Review policies and procedures for controls that are designed to ensure that unauthorized transactions do not occur. Ascertain through reading of policies, procedures, and board of directors' minutes whether investment officers and/or appropriate committee members have been properly authorized to purchase/sell investments and whether there are limitations or restrictions on delegated responsibilities.
6. Obtain a schedule of the book, par, and market values of securities, as well as the rating classifications. Test the accuracy of the market values of a sample of securities and compare the ratings listed to see that they correspond with those of the rating agencies. Review the institution's documentation on any permanent declines in value that have occurred among the sample of securities to determine that any recorded declines in market value are appropriately computed. Examine the institution's computation of the allowance account for securities, if any, for proper presentation and adequacy.
7. Test securities income and accrued interest by:
a. Determining the institution's method of calculating and recording interest accruals;
b. Obtaining trial balances of accrued interest;
c. Testing the reconciliation of the trial balances to the general ledger;
d. Determining that interest accruals are not made on defaulted issues;
e. Selecting items from each type of investment and money market holding:
f. Performing an analytical review of yields on each type of investment and money market holdings for reasonableness.
8. Review investment accounts for volume of purchases, sales activity and length of time securities have been held. Inquire as to the institution's intent and ability to hold securities until maturity. If there is frequent trading in an investment account, such activity may be inconsistent with the notion that the institution has the intent and ability to hold securities to maturity. Test gains and losses on disposal of investment securities by sampling sales transactions and:
a. Determining sales prices by examining invoices or brokers' advices;
b. Checking for the use of trade date accounting and the computation of book value on trade date;
c. Determining that the general ledger has been properly relieved on the investment, accrued interest, premium, discount and other related accounts;
d. Recomputing the gain or loss and compare to the amount recorded in the general ledger; and e. Determining that the sales were approved by the board of directors or a designated committee or were in accordance with policies approved by the board of directors.
9. Determine that sufficient and adequate securities have been collateralized against uninsured deposits, if applicable.
B. Allowance for Fee Receivables 1. Review policies and procedures for ensuring the collectibility of fees due.
2. Test charge-offs and recoveries for proper authorization and/or reporting by reference to the board of directors' minutes.
3. Review the institution's computation of the amount needed in the allowance as of the end of the most recent quarter. Documentation should include consideration of the following matters:
a. Aging of delinquent fees;
b. Ability to offset fees to account assets;
c. Valuation and marketability of assets in fee delinquent accounts;
d. Trends in the level of delinquent fees as compared with previous loss and recovery experience;
e. Monitoring controls; and f. Collection efforts, both internal and through outside sources.
C. Insider Transactions NOTE: For purposes of this section of the procedures, insiders include all affiliates of the institution, including its parent holding company, and all subsidiaries of the institution, as those terms are defined in section 23A of the Federal Reserve Act, as well as the institution's executive officers, directors, principal shareholders, and their related interests, as those terms are defined in section 215.2 of Federal Reserve Regulation O.
1. Review the institution's policies and procedures to ensure that extensions of credit to, and other transactions with, insiders are addressed. Ascertain that the policies include specific guidelines defining fair and reasonable transactions between the institution and insiders, and test insider transactions for compliance with the guidelines and statutory and regulatory requirements. Ascertain that the policies and procedures on extensions of credit comply with the requirements of Federal Reserve Regulation O.
2. Obtain an institution-prepared list of insiders, including any business relationships the institution may have other than as a nominal customer. Also obtain a list of extensions of credit to, and other transactions that the institution, its affiliates, and its subsidiaries have had with, insiders that are outstanding as of the audit date or that have occurred since the prior year's external auditing procedures were performed. Compare the lists to those prepared for the prior year's external auditing program to test for completeness.
3. Review the institution's policies and procedures to ensure that expense accounts of individuals who are executive officers, directors, and principal shareholders are addressed and test a sample of the actual expense account records for compliance with the policies and procedures.
D. Internal Controls - General Accounting and Administrative Controls 1. Review the board of directors' minutes to verify that account reconciliation policies have been established and approved and are reviewed periodically by the board of directors. Determine that management has implemented appropriate procedures to ensure the timely completion of reconciliations of accounting records and the timely resolution of reconciling items.
2. Determine whether the institution's policies regarding segregation of duties and required vacations for employees, including those involved in the EDP function, have been approved by the board of directors and verify that the policies and the implementing procedures established by management are periodically reviewed, are adequate, and are followed.
3. Confirm a sample of deposits in each of the various types of deposit accounts maintained by the institution. Inquire about controls over dormant deposit accounts.
4. Test to determine that reconciliations are prepared for all significant asset and liability accounts, such as "due from" accounts; demand deposits; NOW accounts; money market deposit accounts; other savings deposits; certificates of deposit; and other time deposits and their related accrued interest accounts, if any. Review reconciliations for:
a. Timeliness and frequency;
b. Accuracy and completeness; and c. Review by appropriate personnel with no conflicting duties.
5. Compare a sample of balances per reconciliations to the general ledger and supporting trial balances.
6. Examine detail and aging of a sample of reconciling items from the accounts whose reconciliations have been tested and reviewed and a sample of items in suspense, clearing, and work-in-process accounts by:
a. Testing aging;
b. Determining whether items are followed up on and appropriately resolved on a timely basis; and c. Discussing items remaining on reconciliations and in the suspense account with appropriate personnel to ascertain whether any should be written off. Review a sample of charged-off reconciling and suspense items for proper authorization.
7. Verify through inquiry and observation that the institution maintains adequate records of its off- balance sheet activities. Review the institution's procedures to determine whether probable or reasonably possible losses exist.
E. Internal Controls - Electronic Data Processing Controls 1. Read the board of directors' minutes to determine whether the board of directors has reviewed and approved the institution's electronic data processing (EDP) policies, including those regarding outside servicers, if any, and the in-house use of individual personal computers (PCs) and personalized programs for official institution records, at least annually, confirm that management has established appropriate implementing procedures, and verify the institution's compliance with these policies and procedures.
a. The policies and procedures for either in-house processing or use of an outside service center should include:
b. When an outside service center is employed, the policies and procedures should address the following additional items:
2. In the area of general EDP controls, determine through inquiry and observation that policies and procedures have been established for:
a. Management and user involvement and approval of new or modified application programs;
b. Authorization, approval, and testing of system software modifications;
c. The controls surrounding computer operations processing;
d. Restricted access to computer operations facilities and resources including:
3. With respect to EDP applications controls, inquire about and observe:
a. The controls over:
b. The security over unissued or blank supplies of potentially negotiable items; and c. The control procedures on wire transfers including:
F. Trust Function 1. Supervisory Review a. Determine the significant functions of the department, including areas of responsibility within the department and the financial institution.
b. Review the institution's written policies to determine that sufficient guidelines are established to meet fiduciary responsibilities and to comply with applicable laws. Policies should include:
c. Ascertain the qualifications of the staff and of the board of directors giving consideration to the nature of the fiduciary responsibilities accepted.
d. Determine if board policies are implemented and followed.
2. Accounting and Physical Controls a. Verify account assets. Include a confirmation from holders of assets retained outside the department.
b. Determine that the assets are adequately safeguarded, and held separately from other assets of the institution.
c. Verify that a vault record of assets under joint custody is maintained.
d. Verify prompt ledger control of assets, including worthless assets, received as original and subsequent deposits of assets, including stock splits and dividends.
e. Verify that fiduciary cash accounts are regularly and appropriately reconciled to demand deposit or money market account statements.
f. Verify that internal balancing control procedures are performed each time account ledgers are posted.
g. Verify that suspense or operating accounts are reconciled at least monthly, contain only appropriate items, and are cleared in a timely manner.
h. Reconcile or verify the proper reconcilement of each of the following to the department's general ledger at least quarterly:
i. If applicable, verify reconciliations or reconcile outstanding bonds for bond trusteeships, or paying agent activities.
j. Verify the accurate payment of dividends.
3. Activity Control a. Verify fees paid to the trust company.
b. Verify proceeds from sales of assets to brokers' invoices, sellers' receipts, or other evidence of sales price.
c. Verify payment for purchases of assets to brokers' invoices, sellers' receipts, or other evidence of purchase price.
d. Verify accuracy of amounts and receipt of income from investments.
4. Compliance a. Verify that transactions between fiduciary accounts and directors, officers, or employees of the institution, its holding company or other related entities do not constitute self-dealing. In general, self-dealing is considered to exist when the fiduciary uses or obtains the property held in a fiduciary capacity for his or her own benefit.
b. Review fiduciary account holdings of the following items in light of self-dealing issues:
c. Verify that all accounts for which the institution has investment responsibilities are reviewed by the board of directors or a committee thereof.
d. Verify that cash receipts are promptly invested or distributed.
e. Verify and review the annual audit of each collective investment fund.
5. Administrative Review a. Complete administrative reviews of all major account types, including but not limited to, personal trusts, estates, corporate trusts, collective investment funds, pension trusts and profit sharing trusts. An acceptable administrative review would perform the following practices:
A. Qualifications The following persons may qualify to be responsible for conducting a directors' examination of a trust company:
1. A Certified Public Accountant(s) who holds an active certificate under the laws of this state, or who may practice in this state under a reciprocal agreement between Colorado and the holder's state of certification.
2. A qualified independent person(s) or firm whose credentials have been submitted to and approved by the Colorado State Banking Board to conduct such examinations. The Banking Board will take into consideration such things as past proven work of the person or firm, professional reputation, training and education, and capacity to perform the examination in a timely manner.
3. The Banking Board reserves the right to revoke any previously approved qualification for due cause.
B. Independence A person who conducts or reviews and/or approves a directors' examination of a trust company must be independent with respect to the trust company in fact and appearance. Independence will be considered impaired if, for example, during the period of the directors' examination, or at the time of the issuing of the report, the person:
1. Was or is committed to acquire any direct, or material indirect, financial interest in the institution;
2. Is or was a trustee of any trust, or executor or administrator of any estate, if such trust or estate was or is committed to acquire any direct or material indirect financial interest in the institution;
3. Has or had any joint, closely-held business investment with the institution or any officer, director, or principal stockholder thereof that is material in relation to the net worth of either the institution or the person; or 4. Has or had any loan to or from the institution or any officer, director, or principal shareholder thereof other than loans of the following kinds made by a financial institution under normal lending procedures, terms, and requirements:
a. Loans obtained by the person that are not material in relation to the net worth of the borrower;
b. Home mortgages; and c. Other secured loans, except those secured solely by a guarantee of the person. Independence will also be considered to be impaired if, during the period covered by the financial statements, during the period of the directors' examinations, or at the time of the issuing of the report, the person:
1. Was or is connected with the institution as a promoter, underwriter, voting trustee, director or officer, or in any capacity equivalent to that of a member of management or of an employee;
2. Was or is a trustee for any pension or profit sharing trust of the institution;
3. Received, or had a commitment to receive, other compensation from the institution or a third party for services or products of others to be procured by the institution; or 4. Received, or had a commitment from the institution to receive, a contingent fee. For this purpose, a contingent fee means compensation for the performance of services, payment of which or the amount of which is contingent upon the findings or results of such services.
TC13 Minimum Capital Ratios for Depository Trust Companies [Section 11-109-304, C.R.S.] A. Purpose The Colorado State Banking Board believes that a minimum leverage ratio is necessary because the risk-based capital guidelines detailed in Banking Board Rule TC14-Risk-Based Capital Definitions and Adequacy, that are designed solely as a measure of credit risk, create the possibility for significant leverage. Assets that have no credit risk receive a zero percent risk weight and, therefore, require no capital. However, the Banking Board believes that every institution should have at least a base level of capital as protection against risks not measured by the risk-based capital ratio.
B. Definitions: For the purposes of this Rule:
1. Adjusted total assets means the average total assets figure required to be computed for and stated in an institution's most recent quarterly Consolidated Report of Condition and Income (Call Report), minus end-of-quarter intangible assets, deferred tax assets, and credit-enhancing interest-only strips, that are deducted from Tier 1 capital, and minus nonfinancial equity investments for which a Tier 1 Capital deduction is required pursuant to Paragraph (C)(1)(h) of Banking Board Rule TC14. The Banking Board reserves the right to require an institution to compute and maintain its capital ratios on the basis of actual, rather than average, total assets when necessary to carry out the purposes of this Rule.
2. Tier 1 Capital means "Tier 1 Capital" as determined according to Banking Board Rule TC14- Risk Based Capital Definitions and Adequacy, including the deductions described therein.
3. Tier 2 Capital means "Tier 2 Capital" as determined according to Banking Board Rule TC14- Risk Based Capital Definitions and Adequacy, including the limitations described therein.
4. Total Capital means "Total Capital" as determined according to Banking Board Rule TC14-Risk Based Capital Definitions and Adequacy, including the deductions described therein.
C. Reservation of Authority 1. Deductions from capital. Notwithstanding the definitions of Tier 1 Capital and Tier 2 Capital, the Banking Board may find that a newly developed or modified capital instrument constitutes Tier 1 Capital or Tier 2 Capital, and may permit one or more institutions to include all or a portion of funds obtained through such capital instruments as Tier 1 or Tier 2 Capital, permanently or on a temporary basis, for the purpose of compliance with the Banking Board Rules.
Similarly, the Banking Board may find that a particular intangible asset, deferred tax asset or credit-enhancing interest-only strip need not be deducted from Tier 1 or Tier 2 Capital. Conversely, the Banking Board may find that a particular intangible asset, deferred tax asset, credit-enhancing interest-only strip or other Tier 1 or Tier 2 Capital component, has characteristics or terms that diminish its contribution to an institution's ability to absorb losses, and may require the deduction from Tier 1 or Tier 2 Capital of all of the component or of a greater portion of the component than is otherwise required.
2. Risk weight categories. Notwithstanding the risk categories in Banking Board Rule TC14, the Banking Board will look to the substance of the transaction and may find that the assigned risk weight for any asset, or the credit equivalent amount, or credit conversion factor for any off-balance sheet item does not appropriately reflect the risks imposed on an institution and may require another risk weight, credit equivalent amount, or credit conversion factor that the Banking Board deems appropriate. Similarly, if no risk weight, credit equivalent amount or credit conversion factor is specifically assigned, the Banking Board may assign any risk weight, credit equivalent amount, or credit conversion factor that the Banking Board deems appropriate. In making its determination, the Banking Board considers risks associated with the asset or off-balance sheet item as well as other relevant factors.
D. Initial Capital No trust company shall be granted a charter unless it has paid-in capital stock of at least $1,000,000, or such greater amount as the Banking Board may reasonably require. New trust companies will be required to maintain total capital in an amount necessary to satisfy minimum capital ratios, but not less than $750,000.
E. Minimum Capital Ratios For Depository Trust Companies 1. Risk-based capital ratio. All institutions must have and maintain the minimum risk-based capital ratios as set forth in Banking Board Rule TC14.
2. Total asset leverage ratio (Leverage Ratio). All institutions must have and maintain Tier 1 Capital in an amount equal to at least 3.0 percent of adjusted total assets.
3. Additional leverage ratio requirements. An institution operating at or near the level in Paragraph (E)(2) of this Rule should have well-diversified risks, including no undue interest rate risk exposure; excellent control systems; good earnings; high asset quality; high liquidity; and well managed on- and off-balance sheet activities; and in general be considered a strong organization, rated composite 1 under the CAMELS rating system. For all but the most highly-rated institutions meeting the conditions set forth in this Paragraph, the minimum Tier 1 leverage ratio is 4 percent. In all cases, institutions should hold capital commensurate with the level and nature of all risks.
F. Establishment of Minimum Capital Ratios for an Individual Institution 1. Applicability The Banking Board may require higher minimum capital ratios for an individual institution in view of its circumstances. For example, higher capital ratios may be appropriate for:
a. A newly chartered institution;
b. An institution receiving special supervisory attention;
c. An institution that has, or is expected to have, losses resulting in capital inadequacy;
d. An institution with significant exposure due to risks from concentrations of credit, certain risks arising from nontraditional activities, or management's overall inability to monitor and control financial and operating risks presented by concentrations of credit and nontraditional activities;
e. An institution with significant exposure to declines in the economic value of its capital due to changes in interest rates;
f. An institution with significant exposure due to fiduciary or operational risk;
g. An institution exposed to a high degree of asset depreciation, or a low level of liquid assets in relation to short term liabilities;
h. An institution exposed to a high volume of, or particularly severe, problem assets;
i. An institution that is growing rapidly, either internally or through acquisition; or j. An institution that may be adversely affected by the activities or condition of its parent company, affiliate(s), or other persons or institutions including chain banking organizations, with which it has significant business relationships.
2. Standards for determination of appropriate individual minimum capital ratios. The appropriate minimum capital ratios for an individual institution cannot be determined solely through the application of a rigid mathematical formula or wholly objective criteria. The decision is necessarily based in part on subjective judgment grounded in Banking Board and Division of Banking expertise. The factors to be considered in the determination will vary in each case and may include, for example:
a. The conditions or circumstances leading to the Banking Board's determination that higher capital ratios are appropriate or necessary for the institution;
b. The exigency of those circumstances or potential problems;
c. The overall condition, management strength, and future prospects of the institution and, if applicable, its parent company and/or affiliate(s);
d. The institution's liquidity, capital, risk asset and other ratios compared to the ratios of its peer group; and e. The views of the institution's directors and senior management.
G. Unsafe and unsound practice. Any institution that has less than its minimum leverage capital requirement is deemed to be engaged in unsafe and unsound practice. Except that such an institution that has entered into, and is in compliance with, a written agreement with the Banking Board, or has submitted to the Banking Board; and is in compliance with, a plan approved by the Banking Board to increase its Tier 1 leverage capital ratio to such a level as the Banking Board deems appropriate and to take such other action as may be necessary for the institution to be operated so as not to be engaged in such unsafe or unsound practice will not be deemed to be engaged in unsafe or unsound practice on account of its capital ratios. An institution must file a written capital restoration plan with the Banking Board within forty-five (45) days of the date that the institution receives notice or is deemed to have notice that the institution is undercapitalized, unless the Banking Board notifies the institution in writing that the plan is to be filed within a different period. The Banking Board is not precluded from taking any enforcement action against an institution with capital above the minimum requirement if the specific circumstances deem such action to be appropriate.
H. Statute References to Capital 1. As referenced in the statutes, the following definitions will apply:
a. Section 11-109-306(1)(d), C.R.S., shall refer to the leverage ratio and Tier 1, Tier 2, and Total Capital.
b. Section 11-109-902(2), C.R.S., shall refer to Total Capital.
c. Section 11-109-902(3), C.R.S., shall refer to Total Capital.
d. Section 11-109-902(6), C.R.S., shall refer to Total Capital.
e. Section 11-109-902(7), C.R.S., shall refer to Total Capital.
f. Section 11-109-702(1), C.R.S., shall refer to the leverage ratio. For more detailed information pertaining to these provisions, please contact the Secretary to the Colorado State Banking Board at 1560 Broadway, Suite 1175, Denver, Colorado 80202, (303) 894-7575. TC13.5 Minimum Capital for Non-Depository Trust Companies [Section 11-109-304, C.R.S.] A. Purpose The Colorado State Banking Board believes that trust companies should maintain certain minimum capital levels pursuant to policies set forth in Section 11-101-102, C.R.S., and relevant federal laws and regulations. Accordingly, Banking Board Rule TC13.5-Minimum Capital for Non Depository Trust Companies sets forth certain minimum capital requirements for non-depository trust companies.
B. Definitions: For the purpose of this Rule:
1. Discretionary trust assets are those assets in accounts over which a fiduciary or trustee has managerial authority; as distinguished from directed accounts.
2. A. Effective through December 31, 2006, total capital means the total equity capital figure required to be stated in an institution's most recent quarterly Consolidated Report of Condition (Call Report) less deductions as described in Paragraph (C)(3) of Banking Board Rule TC14.
B. Effective January 1, 2007, total capital means “total capital” as determined according to Banking Board Rule TC14 – Risk Based Capital Definitions and Adequacy, including the deductions described herein.
C. Initial Capital No trust company shall be granted a charter unless it has paid-in capital of at least $1,000,000, or such greater amount as the Banking Board may reasonably require.
D. Minimum Capital for Non-Depository Trust Companies 1. Non-depository trust companies must maintain total capital of not less than the greater of: (1) $750,000, or (2) an amount calculated based on the following factors and thresholds: Non- Discretionary Trust Calculation Factor Assets $0 to $500 Million .125 Percent >$500 Million to $1 .100 Percent Billion >$1 Billion to $5 Billion .075 Percent >$5 Billion to $15 Billion .050 Percent >$15 Billion .01 Percent PLUS Discretionary Trust Calculation Factor Assets $0 to $1 Billion .25 Percent >$1 Billion .15 Percent E. Establishment of Minimum Capital for an Individual Institution 1. Applicability The Banking Board may require higher minimum capital levels for an individual institution in view of its circumstances. For example, higher capital levels may be appropriate for:
a. A newly chartered institution;
b. An institution receiving special supervisory attention;
c. An institution that has, or is expected to have, losses resulting in capital inadequacy;
d. An institution with significant exposure due to risks from concentrations of credit, certain risks arising from nontraditional activities, or management's overall inability to monitor and control financial and operating risks presented by concentrations of credit and nontraditional activities;
e. An institution with significant exposure to declines in the economic value of its capital due to changes in interest rates;
f. An institution with significant exposure due to fiduciary or operational risk;
g. An institution exposed to a high degree of asset depreciation or a low level of liquid assets in relation to short term liabilities;
h. An institution exposed to a high volume of, or particularly severe, problem assets;
i. An institution that is growing rapidly, either internally or through acquisition; or j. An institution that may be adversely affected by the activities or condition of its parent company, affiliate(s), or other persons or institutions including chain banking organizations, with which it has significant business relationships.
2. Standards for Determination of Appropriate Individual Minimum Capital. The appropriate minimum capital ratios for an individual institution cannot be determined solely through the application of a rigid mathematical formula or wholly objective criteria. The decision is necessarily based in part on subjective judgment grounded in Banking Board and Division of Banking expertise. The factors to be considered in the determination will vary in each case and may include, for example:
a. The conditions or circumstances leading to the Banking Board's determination that higher capital levels are appropriate or necessary for the institution;
b. The exigency of those circumstances or potential problems;
c. The overall condition, management strength, and future prospects of the institution and, if applicable, its parent company and/or affiliate(s);
d. The institution's liquidity, capital, risk asset and other ratios compared to the ratios of its peer group; and e. The views of the institution's directors and senior management.
F. Unsafe and unsound practice. Any institution that has less than its minimum capital requirement is deemed to be engaged in unsafe and unsound practice. Except that such an institution that has entered into, and is in compliance with, a written agreement with the Banking Board; or has submitted to the Banking Board, and is in compliance with, a plan approved by the Banking Board to increase its minimum capital to such a level as the Banking Board deems appropriate and to take such other action as may be necessary for the institution to be operated so as not to be engaged in such unsafe or unsound practice will not be deemed to be engaged in unsafe or unsound practice on account of its capital. An institution must file a written capital restoration plan with the Banking Board within forty-five (45) days of the date that the institution receives notice or is deemed to have notice that the institution is undercapitalized, unless the Banking Board notifies the institution in writing that the plan is to be filed within a different period. The Banking Board is not precluded from taking any enforcement action against an institution with capital above the minimum requirement if the specific circumstances deem such action to be appropriate.
G. Statute References to Capital 1. As referenced in the Colorado Revised Statutes, the following definitions will apply:
a. Section 11-109-306(1)(d), C.R.S., shall refer to the leverage ratio and Tier 1, Tier 2, and Total Capital;
b. Section 11-109-902(2), C.R.S., shall refer to Total Capital;
c. Section 11-109-902(3), C.R.S., shall refer to Total Capital;
d. Section 11-109-902(6), C.R.S., shall refer to Total Capital;
e. Section 11-109-902(7), C.R.S., shall refer to Total Capital;
f. Section 11-109-104(2), C.R.S., shall refer to Total Capital; and g. Section 11-109-702(1), C.R.S., shall refer to Total Capital. TC14 Risk-Based Capital Definitions and Adequacy [Section 11-103-201, C.R.S.] A. Purpose.
An important function of the Banking Board and the Division of Banking is to evaluate the adequacy of capital maintained by each regulated institution. Such an evaluation involves the consideration of numerous factors, including the riskiness of an institution’s assets and off- balance sheet items. This Rule implements the Banking Board’s risk-based capital guidelines. The risk-based capital ratio derived from these guidelines is an important factor in the Banking Board and the Division of Banking's evaluation of an institution's capital adequacy. However, because this measure addresses only credit risk, the 8 percent minimum ratio should not be viewed as the level to be targeted, but rather as a floor. The final supervisory judgment on an institution's capital adequacy is based on an individualized assessment of numerous factors, including those listed in Banking Board Rule CB101.51(E)(1). With respect to the consideration of these factors, the Banking Board and Division of Banking will give particular attention to any institution with significant exposure to declines in the economic value of its capital due to changes in interest rates. As a result, it may differ from the conclusion drawn from an isolated comparison of an institution's risk-based capital ratio to the 8 percent minimum specified in these guidelines. In addition to the standards established by these risk-based capital guidelines, all state-chartered trust companies must maintain a minimum capital-to-total assets ratio pursuant to Banking Board Rule TC13.
Certain components of capital, categories of on-balance sheet assets, and categories of off- balance sheet items appearing in this Rule may not apply to state chartered trust companies. Nothing in this Rule shall be construed to increase the powers of state chartered trust companies.
B. Definitions. For the purposes of this Rule, the following definitions apply:
1. "Adjusted carrying value" means the aggregate value that investments are carried on the balance sheet of the institution reduced by any unrealized gains on the investments that are reflected in such carrying value but excluded from the institution's Tier 1 capital and reduced by any associated deferred tax liabilities. For example, for investments held as available-for-sale (AFS), the adjusted carrying value of the investments would be the aggregate carrying value of the investments (as reflected on the consolidated balance sheet of the institution) less any unrealized gains on those investments that are included in other comprehensive income and that are not reflected in Tier 1 capital, and less any associated deferred tax liabilities. Unrealized losses on AFS nonfinancial equity investments must be deducted from Tier 1 capital pursuant to Paragraph (B)(10) of this Rule. The treatment of small business investment companies that are consolidated for accounting purposes under generally accepted accounting principles is discussed in Paragraph (C)(1)(h)(2) of this Rule. For investments in a nonfinancial company that is consolidated for accounting purposes, the institution's adjusted carrying value of the investment is determined under the equity method of accounting (net of any intangibles associated with the investment that are deducted from the institution's Tier 1 capital pursuant to Paragraph (C)(1)(e) of this Rule). Even though the assets of the nonfinancial company are consolidated for accounting purposes, these assets (as well as the credit equivalent amounts of the company's off-balance sheet items) are excluded from the institution's risk-weighted assets.
2. “Allowances for loan and lease losses” means those general valuation allowances that have been established through charges against earnings to absorb losses on loan and lease financing receivables. Allowances for loan and lease losses exclude allocated transfer risk reserves established, and specific reserves created against identified loss.
3. "Asset-backed commercial paper program" means a program that primarily issues externally rated commercial paper backed by assets or other exposures held in a bankruptcy- remote special purpose entity.
4. "Asset-backed commercial paper sponsor" means an institution that:
a. Establishes an asset-backed commercial paper program;
b. Approves the sellers permitted to participate in an asset-backed commercial paper program;
c. Approves the asset pools to be purchased by an asset-backed commercial paper program; or d. Administers the asset-backed commercial paper program by monitoring the assets, arranging for debt placement, compiling monthly reports, or ensuring compliance with the program documents and with the program's credit and investment policy.
5. “Associated company” means any corporation, partnership, business trust, joint venture, association, or similar organization in which an institution directly or indirectly holds a 20 to 50 percent ownership interest.
6. “Banking and finance subsidiary” means any subsidiary of an institution that engages in banking- and finance-related activities.
7. “Cash items in the process of collection” means checks or drafts in the process of collection that are drawn on another depository institution, including a central bank, and that are payable immediately upon presentation in the country in which the reporting institution’s office that is clearing or collecting the check or draft is located; United States Government checks that are drawn on the United States Treasury or any other United States Government or Government-sponsored agency and that are payable immediately upon presentation; broker’s security drafts and commodity or bill-of-lading drafts payable immediately upon presentation in the United States or the country in which the reporting institution's office that is handling the drafts is located; and unposted debts.
8. “Central government” means the national governing authority of a country; it includes the departments, ministries and agencies of the central government and the central bank. The U.S. Central Bank includes the twelve Federal Reserve Banks. The definition of central government does not include the following: State, provincial or local governments; commercial enterprises owned by the central government that are entities engaged in activities involving trade, commerce or profit that are generally conducted or performed in the private sector of the United States economy; and noncentral government entities whose obligations are guaranteed by the central government.
9. “Commitment” means any arrangement that obligates an institution to:
a. Purchase loans or securities; or b. Extend credit in the form of loans or leases, participations in loans or leases, overdraft facilities, revolving credit facilities, home equity lines of credit, liquidity facilities, or similar transactions.
10. “Common stockholders’ equity” means common stock, common stock surplus, undivided profits, capital reserves, and adjustments for the cumulative effect of foreign currency translation, less net unrealized holding losses on available-for-sale equity securities with readily determinable fair values.
11. “Conditional guarantee” means a contingent obligation of the United States Government or its agencies, or the central government of an Organization of Economic Cooperation and Development (OECD) country, the validity of which to the beneficiary is dependent upon some affirmative action; e.g., servicing requirements, on the part of the beneficiary of the guarantee or a third party.
12. "Deferred tax assets" means the tax consequences attributable to tax carryforwards and deductible temporary differences. Tax carryforwards are deductions or credits that cannot be used for tax purposes during the current period, but can be carried forward to reduce taxable income or taxes payable in a future period or periods. Temporary differences are financial events or transactions that are recognized in one period for financial statement purposes, but are recognized in another period or periods for income tax purposes. Deductible temporary differences are temporary differences that result in a reduction of taxable income in a future period or periods.
13. "Derivative contract" means generally a financial contract whose value is derived from the values of one or more underlying assets, reference rates or indexes of asset values. Derivative contracts include interest rate, foreign exchange rate, equity, precious metals and commodity contracts, or any other instrument that poses similar credit risks.
14. “Depository institution” means a financial institution that engages in the business of banking; that is recognized as a bank by the bank supervisory or monetary authorities of the country of its incorporation and the country of its principal banking operations; that receives deposits to a substantial extent in the regular course of business; and that has the power to accept demand deposits. In the United States, this definition encompasses all federally insured offices of commercial banks, mutual and stock savings banks, savings or building and loan associations (stock and mutual), cooperative banks, credit unions, and international banking facilities of domestic depository institutions. In addition, this definition encompasses all federally insured Colorado state chartered offices of industrial banks and trust companies. Bank holding companies are excluded from this definition. For the purposes of assigning risk weights, the differentiation between OECD depository institutions and non-OECD depository institutions is based on the country of incorporation. Claims on branches and agencies of foreign banks located in the United States are to be categorized on the basis of the parent bank’s country of incorporation.
15. "Equity investment" means any equity instrument including warrants and call options that give the holder the right to purchase an equity instrument, any equity feature of a debt instrument (such as a warrant or call option), and any debt instrument that is convertible into equity. An investment in any other instrument, including subordinated debt or other types of debt instruments, may be treated as an equity investment if the Banking Board determines that the instrument is the functional equivalent of equity or exposes the institution to essentially the same risks as an equity instrument.
16. “Exchange rate contracts” include: Cross-currency interest rate swaps; forward foreign exchange rate contracts; currency options purchased; and any similar instrument that, in the opinion of the Banking Board gives rise to similar risks.
17. “Goodwill” means an intangible asset that represents the excess of the purchase price over the fair market value of tangible and identifiable intangible assets acquired in purchases accounted for under the purchase method of accounting.
18. “Intangible assets” include mortgage and non-mortgage servicing assets [but exclude any interest only (IO) strips receivable related to these mortgage and nonmortgage servicing assets], purchased credit card relationships, goodwill, favorable leaseholds, and core deposit value.
19. “Interest rate contracts” include: Single currency interest rate swaps; basis swaps; forward rate agreements; interest rate options purchased; forward deposits accepted; and any similar instrument that, in the opinion of the Banking Board, gives rise to similar risks, including when-issued securities.
20. "Liquidity facility" means a legally binding commitment to provide liquidity to various types of transactions, structures, or programs. A liquidity facility that supports asset-backed commercial paper, in any amount, by lending to, or purchasing assets from any structure, program, or conduit constitutes an asset-backed commercial paper liquidity facility.
21. "Multifamily residential property" means any residential property consisting of five or more dwelling units including apartment buildings, condominiums, cooperatives, and other similar structures primarily for residential use, but not including hospitals, nursing homes, or other similar facilities.
22. "Nationally recognized statistical rating organization (NRSRO)" means an entity recognized by the Division of Market Regulation of the Securities and Exchange Commission (or any successor Division) (Commission or SEC) as a nationally recognized statistical rating organization for various purposes, including the Commission's uniform net capital requirements for brokers and dealers.
23. "Nonfinancial equity investment" means any equity investment held by an institution in a nonfinancial company through a small business investment company (SBIC) under section 302(b) of the Small Business Investment Act of 1958 or under the portfolio investment provisions of Regulation K. An equity investment made under section 302(b) of the Small Business Investment Act of 1958 in a SBIC that is not consolidated with the institution is treated as a nonfinancial equity investment in the manner provided in Paragraph (C)(1)(h)(2)(c) of this Rule. A nonfinancial company is an entity that engages in any activity that has not been determined to be permissible for an institution to conduct directly or to be financial in nature or incidental to financial activities under section 4(k) of the Bank Holding Company Act.
24. “OECD-based group of countries” comprises all full members of the OECD regardless of entry date, plus countries that have concluded special lending arrangements with the International Monetary Fund (IMF) associated with the IMF’s General Arrangements to Borrow but excludes any country that has rescheduled its external sovereign debt within the previous five years. These countries are hereinafter referred to as “OECD countries.” A rescheduling of external sovereign debt generally would include any renegotiation of terms arising from a country's inability or unwillingness to meet its external debt service obligations, but generally would not include renegotiations of debt in the normal course of business, such as a renegotiation to allow the borrower to take advantage of a decline in interest rates or other changes in market conditions. (As of November 1995, the OECD included the following countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States; and Saudi Arabia had concluded special lending arrangements with the IMF associated with the IMF's General Arrangements to Borrow.)
25. “Original maturity” means, with respect to a commitment, the earliest possible date after a commitment is made on which the commitment is scheduled to expire (i.e., it will reach its stated maturity and cease to be binding on either party), provided that either:
a. The commitment is not subject to extension or renewal and will actually expire on its stated expiration date; or b. If the commitment is subject to extension or renewal beyond its stated expiration date, the stated expiration date will be deemed the original maturity only if the extension or renewal must be based upon terms and conditions independently negotiated in good faith with the customer at the time of the extension or renewal and upon a new, bona fide credit analysis utilizing current information on financial condition and trends.
26. “Preferred stock” includes the following instruments:
a. “Convertible preferred stock,” means preferred stock that is mandatorily convertible into either common or perpetual preferred stock;
b. “Intermediate-term preferred stock,” means preferred stock with an original maturity of at least five years, but less than twenty (20) years;
c. “Long-term preferred stock,” means preferred stock with an original maturity of twenty
d. “Perpetual preferred stock,” means preferred stock without a fixed maturity date that cannot be redeemed at the option of the holder, and that has no other provisions that will require future redemption of the issue.
27. “Public-sector entities” include states, local authorities and governmental subdivisions below the central government level in an OECD country. In the United States, this definition encompasses a state, county, city, town, or other municipal corporation, a public authority, and generally any publicly-owned entity that is an instrumentality of a state or municipal corporation. This definition does not include commercial companies owned by the public sector. (See "central government" definition for further explanation of commercial companies owned by the public sector.)
28. “Reciprocal holdings of bank capital instruments” means cross-holdings or other formal or informal arrangements in which two or more banking organizations swap, exchange, or otherwise agree to hold each other’s capital instruments. This definition does not include holdings of capital instruments issued by other banking organizations that were taken in satisfaction of debts previously contracted, provided that the reporting institution has not held such instruments for more than five (5) years or a longer period approved by the Banking Board.
29. “Replacement cost” means, with respect to interest rate and exchange rate contracts, the loss that would be incurred in the event of a counterparty default, as measured by the net cost of replacing the contract at the current market value. If default would result in a theoretical profit, the replacement value is considered to be zero. The mark-to-market process should incorporate changes in both interest rates and counterparty credit quality.
30. “Residential properties” means houses, condominiums, cooperative units, and manufactured homes. This definition does not include boats or motor homes, even if used as a primary residence.
31. “Risk-weighted assets” means the sum of total risk-weighted balance sheet assets and the total of risk-weighted off-balance sheet credit equivalent amounts. Risk-weighted balance sheet and off-balance sheet assets are calculated pursuant to Paragraph (D) of this Rule.
32. “Subsidiary” means any corporation, partnership, business trust, joint venture, association or similar organization in which an institution directly or indirectly holds more than a 50 percent ownership interest. This definition does not include ownership interests that were taken in satisfaction of debts previously contracted, provided that the reporting institution has not held the interest for more than five years or a longer period approved by the Banking Board.
33. “Total capital” means the sum of an institution’s core (Tier 1) and qualifying supplementary (Tier 2) capital elements.
34. “Unconditionally cancelable” means, with respect to a commitment-type lending arrangement, that the institution may, at any time, with or without cause, refuse to advance funds or extend credit under the facility. In the case of home equity lines of credit, the institution is deemed able to unconditionally cancel the commitment if it can, at its option, prohibit additional extensions of credit, reduce the line, and terminate the commitment to the full extent permitted by relevant state and Federal law.
35. “United States Government or its agencies” means an instrumentality of the United States Government whose debt obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the United States Government.
36. “United States Government-sponsored agency” means an agency originally established or chartered to serve public purposes specified by the United States Congress, but whose obligations are not explicitly guaranteed by the full faith and credit of the United States Government.
37. "Walkaway clause" means a provision in a bilateral netting contract that permits a nondefaulting counterparty to make a lower payment than it would make otherwise under the bilateral netting contract, or no payment at all, to a defaulter or the estate of a defaulter, even if the defaulter or the estate of the defaulter is a net creditor under the bilateral netting contract.
C. Components of Capital. An institution’s qualifying capital base consists of two types of capital--core (Tier 1) and supplementary (Tier 2).
1. Tier 1 Capital. The following elements comprise an institution’s Tier 1 capital:
a. Common stockholders’ equity;
b. Noncumulative perpetual preferred stock and related surplus (Preferred stock issues where the dividend is reset periodically based upon current market conditions and the institution’s current credit rating, including but not limited to, auction rate, money market or remarketable preferred stock, are assigned to Tier 2 capital, regardless of whether the dividends are cumulative or noncumulative.); and c. Minority interests in the equity accounts of consolidated subsidiaries, except that the following are not included in Tier 1 capital or total capital:
d. Less: Goodwill;
e. Less: Other intangible assets, except mortgage servicing assets, purchased credit card relationships, and nonmortgage servicing assets subject to the following conditions. (Intangible assets are defined to exclude IO strips receivable related to these mortgage and non-mortgage servicing assets. See Paragraph (B)(18) of this Rule. Consequently, IO strips receivable related to mortgage and non-mortgage servicing assets are not required to be deducted under this Paragraph. However, credit-enhancing IO strips as defined in Paragraph (E)(1)
f. Less: Certain deferred tax assets.
g. Less: Credit-enhancing IO strips (as defined in Paragraph (E)(1)(b) of this Rule). Credit-enhancing IO strips, whether purchased or retained, that exceed 25 percent of Tier 1 capital must be deducted from Tier 1 capital. Purchased and retained credit-enhancing IO strips, on a non-tax adjusted basis, are included in the total amount that is used for purposes of determining whether an institution exceeds its Tier 1 capital.
h. Less: Nonfinancial equity investments as provided by this section.
TABLE A Deduction for Nonfinancial Equity Investments Aggregate adjusted Deduction from Tier 1 carrying value of all capital (as a percentage of nonfinancial equity the adjusted carrying investments held directly value of the investment)
or indirectly by institutions (as a percentage of the Tier 1 capital of the institution)1 Less than 15 percent 8.0 percent Greater than or equal to 12.0 percent 15 percent but less than 25 percent Greater than or equal to 25.0 percent 25 percent 1 For purposes of calculating the adjusted carrying value of nonfinancial equity investments as a percentage of Tier 1 capital, Tier 1 capital is defined as the sum of the Tier 1 capital elements net of goodwill and net of all identifiable intangible assets other than mortgage servicing assets, nonmortgage servicing assets and purchased credit card relationships, but prior to the deduction for disallowed mortgage servicing assets, disallowed nonmortgage servicing assets, disallowed purchased credit card relationships, disallowed credit-enhancing IO strips (both purchased and retained), disallowed deferred tax assets, and nonfinancial equity investments.
2. Tier 2 Capital. Tier 2 capital is limited to 100 percent of Tier 1 capital. The following elements comprise an institution’s Tier 2 capital:
a. Allowance for loan and lease losses, up to a maximum of 1.25 percent of risk- weighted assets. (The amount of the allowance for loan and lease losses that may be included in capital is based on a percentage of risk-weighted assets. The gross sum of risk-weighted assets used in this calculation includes all risk- weighted assets, with the exception of the assets required to be deducted from capital under Paragraph (D) of this Rule in establishing risk-weighted assets (i.e., the assets required to be deducted from capital under Paragraph (C) of this Rule. An institution may deduct reserves for loan and lease losses in excess of the amount permitted to be included as capital, as well as allocated transfer risk reserves and reserves held against other real estate owned, from the gross sum of risk-weighted assets in computing the denominator of the risk-based capital ratio.)
b. Cumulative perpetual preferred stock, long-term preferred stock, convertible preferred stock, and any related surplus, without limit, if the issuing institution has the option to defer payment of dividends on these instruments. For long-term preferred stock, the amount that is eligible to be included as Tier 2 capital is reduced by 20 percent of the original amount of the instrument (net of redemptions) at the beginning of each of the last five years of the life of the instrument.
c. Hybrid capital instruments, without limit. Hybrid capital instruments are those instruments that combine certain characteristics of debt and equity, such as perpetual debt. To be included as Tier 2 capital, these instruments must meet the following criteria:
(Mandatory convertible debt instruments that meet the requirements of Paragraphs (C)(2)(d)(1) through (7) and that unqualifiedly require the issuer to exchange either common or perpetual preferred stock for such instruments by a date at or before the maturity of the instrument (the maturity of these instruments must be 12 years or less), or that have been previously approved as capital by the Banking Board, are treated as qualifying hybrid capital instruments.)
d. Term subordinated debt instruments and intermediate-term preferred stock and related surplus are included in Tier 2 capital, but only to a maximum of 50 percent of Tier 1 capital as calculated after deductions pursuant to Paragraphs (C)(1)(d) through
e. Up to 45 percent of pretax net unrealized holding gains (that is, the excess, if any, of the fair value over historical cost) on available-for-sale equity securities with readily determinable fair values. However, the Banking Board may exclude all or a portion of these unrealized gains from Tier 2 capital if the Banking Board determines that the equity securities are not prudently valued. Unrealized gains (losses) on other types of assets, such as institution premises and available-for- sale debt securities, are not included in Tier 2 capital, but the Banking Board may take these unrealized gains (losses) into account as additional factors when assessing an institution's overall capital adequacy.
3. Deductions From Total Capital (the sum of Tier 1 capital plus Tier 2 capital). The following items are deducted from total capital:
a. Investments, both equity and debt, in unconsolidated banking and finance subsidiaries that are deemed to be capital of the subsidiary. The Banking Board may require deduction of investments in other subsidiaries and associated companies on a case-by-case basis.
b. Reciprocal holdings of capital instruments issued by banks.
D. Risk Categories/Weights for On-Balance Sheet Assets and Off-Balance Sheet Items 1. The denominator of the risk-based capital ratio, i.e., an institution's risk-weighted assets, is derived by assigning that institution's assets and off-balance sheet items to one of the four risk categories detailed in Paragraph (D)(7) of this Rule. Each category has a specific risk weight.
2. Before an off-balance sheet item is assigned a risk weight, it is converted to an on-balance sheet credit equivalent amount pursuant to Paragraph (D)(8) of this Rule.
3. The risk weight assigned to a particular asset or on-balance sheet credit equivalent amount determines the percentages of that asset/credit equivalent that is included in the denominator of the institution's risk-based capital ratio. Any asset deducted from an institution's capital in computing the numerator of the risk-based capital ratio is not included as part of the institution's risk-weighted assets.
4. The Banking Board reserves the right to require an institution to compute its risk-based capital ratio on the basis of average, rather than period-end, risk-weighted assets when necessary to carry out the purposes of these guidelines.
5. Some of the assets on an institution’s balance sheet may represent an indirect holding of a pool of assets, e.g., mutual funds, that encompasses more than one risk weight within the pool. In those situations, the institution may assign the asset to the risk category applicable to the highest risk-weighted asset that pool is permitted to hold pursuant to its stated investment objectives in the fund's prospectus. Alternatively, the institution may assign the asset on a pro rata basis to different risk categories according to the investment limits in the fund's prospectus. In either case, the minimum risk weight that may be assigned to such a pool is 20 percent. If an institution assigns the asset on a pro rata basis, and the sum of the investment limits in the fund's prospectus exceeds 100 percent, the institution must assign the highest pro rata amounts of its total investment to the higher risk category. If, in order to maintain a necessary degree of liquidity, the fund is permitted to hold an insignificant amount of its assets in short-term, highly-liquid securities of superior credit quality (that do not qualify for a preferential risk weight), such securities generally will not be taken into account in determining the risk category into which the institution’s holding in the overall pool should be assigned. The prudent use of hedging instruments by a fund to reduce the risk of its assets will not increase the risk- weighting of the investment in that fund above the 20 percent category. However, if a fund engages in any activities that are deemed to be speculative in nature or has any other characteristics that are inconsistent with the preferential risk weighting assigned to the fund's assets, the institution's investment in the fund will be assigned to the 100 percent risk category. More detail on the treatment of mortgage-backed securities is provided in Paragraph (D)(7)(c)(6) of this Rule.
6. In addition, when certain institutions that are engaged in trading activities calculate the risk- based capital ratio under this Rule, the institution must also refer to Appendix B, which incorporates capital charges for certain market risk into the risk-based capital ratio. When calculating the risk-based capital ratio, such institutions are required to refer to Appendix B for supplemental rules to determine qualifying and excess capital, calculate risk-weighted assets, calculate market risk equivalent assets and add them to risk- weighted assets, and calculate risk-based capital ratios as adjusted for market risk. (Trading activity means the gross sum of trading assets and liabilities as reported in the institution's most recent Call Report.
7. On-Balance Sheet Assets. The following are the risk categories/weights for on-balance sheet assets:
a. Zero percent risk weight.
b. Twenty percent risk weight.
c. Fifty percent risk weight.
NOTE: For the purposes of the debt service requirements in Paragraphs (D)(7)(c)(5)(e)(ii) and (f)(ii) of this Rule, other forms of debt service coverage that generate sufficient cash flows to provide comparable protection to the institution may be considered for: (a) a loan secured by cooperative housing; or (b) a multifamily residential property loan if the purpose of the loan is for the development or purchase of multifamily residential property primarily intended to provide low- to moderate- income housing, including special operating reserve accounts or special operating subsidies provided by federal, state, local or private sources. However, the Banking Board reserves the right, on a case-by-case basis, to review the adequacy of any other forms of comparable debt service coverage relied on by the institution.
d. One hundred percent risk weight. All other assets not specified above, including, but not limited to:
e. Asset-backed commercial paper programs subject to consolidation.
f. Other variable interest entities subject to consolidation. If an institution is required to consolidate the assets of a variable interest entity other than an asset-backed commercial paper program under generally accepted accounting principles, the institution must assess a risk-based capital charge based on the appropriate risk weight of the consolidated assets pursuant to Paragraphs (D)(7) and (E) of this Rule. Any direct credit substitutes and recourse obligations (including residual interests), and loans that an institution may provide to such a variable interest entity are not subject to any capital charge under Paragraph (E) of this Rule.
8. Off-Balance Sheet Activities. The risk weight assigned to an off-balance sheet item is determined by a two-step process. First, the face amount of the off-balance sheet item is multiplied by the appropriate credit conversion factor specified in this Paragraph (D)(8). This calculation translates the face amount of an off-balance sheet item into an on- balance sheet credit equivalent amount. Second, the resulting credit equivalent amount is then assigned to the proper risk category using the criteria regarding obligors, guarantors and collateral listed in Paragraph (D)(7) of this Rule, or external credit rating pursuant to Paragraph (E)(4) of this Rule, if applicable. Collateral and guarantees are applied to the face amount of an off-balance sheet item; however, with respect to derivative contracts under Paragraph (D)(8)(g) of this Rule, collateral and guarantees are applied to the credit equivalent amounts of such derivative contracts. The following are the credit conversion factors and the off-balance sheet items to which they apply. However, direct credit substitutes, recourse obligations, and securities issued in connection with asset securitizations are treated as described in Paragraph (E) of this Rule.
a. One hundred percent credit conversion factor.
b. Fifty percent credit conversion factor.
c. Twenty percent credit conversion factor.
d. Ten percent credit conversion factor.
e. Zero percent credit conversion factor.
f. Liquidity facility provided to asset-backed commercial paper.
g. Derivative Contracts.
TABLE B Conversion Factor Matrix 1 Remaining Maturity 2 Interest Rate Foreign Exchange Equity 2 Rateand Gold One Year or Less 0.0% 1.0% 6.0% More Than One Year to 0.5% 5.0% 8.0% Five Years More Than Five Years 1.5% 7.5% 10.0% 1 For derivative contracts with multiple exchanges of principal, the conversion factors are multiplied by the number of remaining payments in the derivative contract.
2 For derivative contracts that automatically reset to zero value following a payment, the remaining maturity equals the time until the next payment. However, interest rate contracts with remaining maturities of greater than one year shall be subject to a minimum conversion factor of 0.5 percent NOTE: For purposes of calculating either the potential future credit exposure under Paragraph (D)(8)(g)(1)(b) of this Rule or the gross potential future credit exposure under Paragraph (D)(8) (g)(2)(a)(2) of this Rule for foreign exchange contracts and other similar contracts in which the notional principal is equivalent to the cash flows, total notional principal is the net receipts to each party falling due on each value date in each currency. No potential future credit exposure is calculated for single currency interest rate swaps in which payments are made based upon two floating rate indices (so-called floating/floating or basis swaps); the credit equivalent amount is measured solely on the basis of the current credit exposure.
A = 0.4 X A + (0.6 X NGR X A )
net gross gross A is the adjusted sum of the potential future credit exposure, net Agross is the gross potential future credit exposure, and NGR is the net to gross ratio. A is the sum of the gross potential future credit exposure (as determined pursuant to Paragraph (D)(8)(g)(1)(b) of this Rule) for each individual derivative contract subject to the qualifying bilateral netting contract. The NGR is the ratio of the net current credit exposure to the gross current credit exposure. In calculating the NGR, the gross current credit exposure equals the sum of the positive current credit exposures (as determined pursuant to Paragraph (D)(8)(g)(1)(a) of this Rule) of all individual derivative contracts subject to the qualifying bilateral netting contract.
default, insolvency, bankruptcy, or other similar circumstances.
E. Recourse, Direct Credit Substitutes and Positions in Securitizations 1. Definitions. For purposes of Paragraph (E) of this Rule, the following definitions apply:
a. "Credit derivative" means a contract that allows one party (the protection purchaser) to transfer the credit risk of an asset or off-balance sheet credit exposure to another party (the protection provider). The value of a credit derivative is dependent, at least in part, on the credit performance of a "reference asset." b. "Credit-enhancing interest-only strip" means an on-balance sheet asset that, in form or in substance:
c. "Credit-enhancing representations and warranties" means representations and warranties that are made or assumed in connection with a transfer of assets (including loan servicing assets) and that obligate an institution to protect investors from losses arising from credit risk in the assets transferred or the loans serviced. Credit-enhancing representations and warranties include promises to protect a party from losses resulting from the default or nonperformance of another party or from an insufficiency in the value of the collateral. Credit- enhancing representations and warranties do not include:
d. "Direct credit substitute" means an arrangement in which an institution assumes, in form or in substance, credit risk associated with an on- or off-balance sheet asset or exposure that was not previously owned by the institution (third-party asset), and the risk assumed by the institution exceeds the pro rata share of the institution's interest in the third-party asset. If an institution has no claim on the third-party asset, then the institution's assumption of any credit risk is a direct credit substitute. Direct credit substitutes include:
e. "Externally rated" means that an instrument or obligation has received a credit rating from at least one nationally recognized statistical rating organization.
f. "Face amount" means the notional principal, or face value, amount of an off-balance sheet item; the amortized cost of an asset not held for trading purposes; and the fair value of a trading asset.
g. "Financial asset" means cash or other monetary instrument, evidence of debt, evidence of an ownership interest in an entity, or a contract that conveys a right to receive or exchange cash or another financial instrument from another party.
h. "Financial standby letter of credit" means a letter of credit or similar arrangement that represents an irrevocable obligation to a third-party beneficiary:
i. "Mortgage servicer cash advance" means funds that a residential mortgage servicer advances to ensure an uninterrupted flow of payments, including advances made to cover foreclosure costs or other expenses to facilitate the timely collection of the loan. A mortgage servicer cash advance is not a recourse obligation or a direct credit substitute if:
j. "Nationally recognized statistical rating organization (NRSRO)" means an entity recognized by the Division of Market Regulation of the Securities and Exchange Commission (or any successor Division) (Commission) as a nationally recognized statistical rating organization for various purposes, including the Commission's uniform net capital requirements for brokers and dealers.
k. "Recourse" means an institution's retention, in form or in substance, of any credit risk directly or indirectly associated with an asset it has sold that exceeds a pro rata share of that institution's claim on the asset. If an institution has no claim on a sold asset, then the retention of any credit risk is recourse. A recourse obligation typically arises when an institution transfers assets and retains an explicit obligation to repurchase assets or to absorb losses due to a default on the payment of principal or interest or any other deficiency in the performance of the underlying obligor or some other party. Recourse may also exist implicitly if an institution provides credit enhancement beyond any contractual obligation to support assets it has sold. The following are examples of recourse arrangements:
l. "Residual interest" means any on-balance sheet asset that represents an interest (including a beneficial interest) created by a transfer that qualifies as a sale (pursuant to generally accepted accounting principles) of financial assets, whether through a securitization or otherwise, and that exposes an institution to any credit risk directly or indirectly associated with the transferred asset that exceeds a pro rata share of that institution's claim on the asset, whether through subordination provisions or other credit enhancement techniques. Residual interests generally include credit-enhancing IO strips, spread accounts, cash collateral accounts, retained subordinated interests (and other forms of overcollateralization) and similar assets that function as a credit enhancement. Residual interests further include those exposures that, in substance, cause the institution to retain the credit risk of an asset or exposure that had qualified as a residual interest before it was sold. Residual interests generally do not include interests purchased from a third party.
m. "Risk participation" means a participation in which the originating party remains liable to the beneficiary for the full amount of an obligation (e.g., a direct credit substitute) notwithstanding that another party has acquired a participation in that obligation.
n. "Securitization" means the pooling and repackaging by a special purpose entity of assets or other credit exposures that can be sold to investors. Securitization includes transactions that create stratified credit risk positions whose performance is dependent upon an underlying pool of credit exposures, including loans and commitments.
o. "Structured finance program" means a program where receivable interests and asset- backed securities issued by multiple participants are purchased by a special purpose entity that repackages those exposures into securities that can be sold to investors. Structured finance programs allocate credit risks, generally, between the participants and credit enhancement provided to the program.
p. "Traded position" means a position retained, assumed or issued in connection with a securitization that is externally rated, where there is a reasonable expectation that, in the near future, the rating will be relied upon by:
2. Credit equivalent amounts and risk weights of recourse obligations and direct credit substitutes.
a. Credit-equivalent amount. Except as otherwise provided, the credit-equivalent amount for a recourse obligation or direct credit substitute is the full amount of the credit-enhanced assets for which the institution directly or indirectly retains or assumes credit risk multiplied by a 100 percent conversion factor.
b. Risk-weight factor. To determine the institution's risk-weighted assets for off-balance sheet recourse obligations and direct credit substitutes, the credit equivalent amount is assigned to the risk category appropriate to the obligor in the underlying transaction, after considering any associated guarantees or collateral. For a direct credit substitute that is an on-balance sheet asset (e.g., a purchased subordinated security), an institution must calculate risk-weighted assets using the amount of the direct credit substitute and the full amount of the assets it supports, i.e., all the more senior positions in the structure.
3. Credit equivalent amount and risk weight of participations in, and syndications of, direct credit substitutes. The credit equivalent amount for a participation interest in, or syndication of, a direct credit substitute is calculated and risk weighted as follows:
a. In the case of a direct credit substitute in which an institution has conveyed a risk participation, the full amount of the assets that are supported by the direct credit substitute is converted to a credit equivalent amount using a 100 percent conversion factor. The pro rata share of the credit equivalent amount that has been conveyed through a risk participation is then assigned to whichever risk- weight category is lower: the risk-weight category appropriate to the obligor in the underlying transaction, after considering any associated guarantees or collateral, or the risk-weight category appropriate to the party acquiring the participation. The pro rata share of the credit equivalent amount that has not been participated out is assigned to the risk-weight category appropriate to the obligor after considering any associated guarantees or collateral.
b. In the case of a direct credit substitute in which the institution has acquired a risk participation, the acquiring institution's pro rata share of the direct credit substitute is multiplied by the full amount of the assets that are supported by the direct credit substitute and converted using a 100 percent credit conversion factor. The resulting credit equivalent amount is then assigned to the risk- weight category appropriate to the obligor in the underlying transaction, after considering any associated guarantees or collateral.
c. In the case of a direct credit substitute that takes the form of a syndication where each institution or participating entity is obligated only for its pro rata share of the risk and there is no recourse to the originating entity, each institution's credit equivalent amount will be calculated by multiplying only its pro rata share of the assets supported by the direct credit substitute by a 100 percent conversion factor. The resulting credit equivalent amount is then assigned to the risk- weight category appropriate to the obligor in the underlying transaction, after considering any associated guarantees or collateral.
4. Externally rated positions: credit-equivalent amounts and risk weights.
a. Traded positions. With respect to a recourse obligation, direct credit substitute, residual interest (other than a credit-enhancing IO strip) or asset- or mortgage- backed security that is a "traded position" and that has received an external rating on a long-term position that is one grade below investment grade or better, or a short-term position that is investment grade, the institution may multiply the face amount of the position by the appropriate risk weight, determined pursuant to Tables C or D of this Rule (stripped mortgage-backed securities or other similar instruments, such as IO or PO strips, that are not credit enhancing must be assigned to the 100 percent risk category). If a traded position receives more than one external rating, the lowest single rating will apply. TABLE C Long-Term Rating Examples Risk Weight (In Percent)
Category Highest or second highest AAA, AA 20 investment grade Third highest investment A 50 grade Lowest investment grade BBB 100 One category below BB 200 investment grade TABLE D Short-Term Rating Examples Risk Weight(In Percent)
Category Highest investment grade A-1, P-1 20 Second highest A-2, P-2 50 investment grade Lowest investment grade A-3. P-3 100 b. Non-traded positions. A recourse obligation, direct credit substitute, residual interest (but not a credit-enhancing IO strip) or asset- or mortgage-backed security extended in connection with a securitization that is not a "traded position" may be assigned a risk weight pursuant to Paragraph (E)(4)(a) of this Rule if:
5. Senior positions not externally rated. For a recourse obligation, direct credit substitute, residual interest or asset- or mortgage-backed security that is not externally rated but is senior or preferred in all features to a traded position (including collateralization and maturity) an institution may apply a risk weight to the face amount of the senior position pursuant to Paragraph (E)(4)(a) of this Rule, based upon the traded position, subject to any current or prospective supervisory guidance and the institution satisfying the Banking Board that this treatment is appropriate. This Paragraph (E) will apply only if the traded position provides substantive credit support to the unrated position until the unrated position matures.
6. Residual Interests.
a. Concentration limit on credit-enhancing IO strips. In addition to the capital requirement provided by Paragraph (E)(6)(b) of this Rule, an institution must deduct from Tier 1 capital all credit-enhancing IO strips in excess of 25 percent of Tier 1 capital pursuant to Paragraph (C)(1)(e) of this Rule.
b. Credit-enchancing IO strip capital requirement. After applying the concentration limit to credit-enhancing IO strips pursuant to Paragraph (E)(6)(a) of this Rule, an institution must maintain risk-based capital for a credit-enhancing IO strip equal to the remaining amount of the credit-enhancing IO strip (net of any existing associated deferred tax liability), even if the amount of risk-based capital required to be maintained exceeds the full risk-based capital requirement for the assets transferred. Transactions that, in substance, result in the retention of credit risk associated with a transferred credit-enhancing IO strip will be treated as if the credit-enhancing IO strip was retained by the institution and not transferred.
c. Other residual interests capital requirement. Except as provided in Paragraphs (E)
d. Residual interests and other recourse obligations. Where the aggregate capital requirement for residual interests (including credit-enhancing IO strips) and recourse obligations arising from the same transfer of assets exceed the full risk- based capital requirement for those assets, an institution must maintain risk- based capital equal to the greater of the risk-based capital requirement for the residual interest as calculated under Paragraphs (E)(6)(a) through (c) of this Rule or the full risk-based capital requirement for the assets transferred.
7. Positions that are not rated by an NRSRO. A position (but not a residual interest) extended in connection with a securitization and that is not rated by an NRSRO may be risk- weighted based on the institution's determination of the credit rating of the position, as specified in Table E of this Rule, multiplied by the face amount of the position. In order to qualify for this treatment, the institution's system for determining the credit rating of the position must meet one of the three alternative standards set out in Paragraphs (E)(7)(a) through (c) of this Rule.
Investment grade BBB, or Better 100 One category below BB 200 investment grade a. Internal risk rating used for asset-backed programs. A direct credit substitute (but not a purchased credit-enhancing IO strip) is assumed by an institution in connection with an asset-backed commercial paper program sponsored by the institution and the institution is able to demonstrate to the satisfaction of the Banking Board, prior to relying upon its use, that the institution's internal credit risk rating system is adequate. Adequate internal credit risk rating systems usually contain the following criteria:
b. Program Ratings. A direct credit substitute or recourse obligation (but not a residual interest) is assumed or retained by an institution in connection with a structured finance program and a NRSRO has reviewed the terms of the program and stated a rating for positions associated with the program. If the program has options for different combinations of assets, standards, internal credit enhancements and other relevant factors, and the NRSRO specifies ranges of rating categories to them, the institution may apply the rating category applicable to the option that corresponds to the institution's position. In order to rely on a program rating, the institution must demonstrate to the Banking Board's satisfaction that the credit risk rating assigned to the program meets the same standards generally used by NRSROs for rating traded positions. The institution must also demonstrate to the Banking Board's satisfaction that the criteria underlying the NRSRO's assignment of ratings for the program are satisfied for the particular position. If an institution participates in a securitization sponsored by another party the Banking Board may authorize the institution to use this approach based on a program rating obtained by the sponsor of the program.
c. Computer Program. The institution is using an acceptable credit assessment computer program to determine the rating of a direct credit substitute or recourse obligation (but not a residual interest) extended in connection with a structured finance program. A NRSRO must have developed the computer program and the institution must demonstrate to the Banking Board's satisfaction that ratings under the program correspond credibly and reliably with the rating of traded positions.
8. Limitations on risk-based capital requirements.
a. Low-level exposure rule. If the maximum contractual exposure to loss retained or assumed by an institution is less than the effective risk-based capital requirement, as determined pursuant to Paragraph (E)(2) of this Rule, for the asset supported by the institution's position, the risk-based capital required under this Rule is limited to the institution's contractual exposure, less any recourse liability account established pursuant to generally accepted accounting principles. This limitation does not apply when an institution provides credit enhancement beyond any contractual obligation to support assets that it has sold.
b. Related on-balance sheet assets. If an asset is included in the calculation of the risk-based capital requirements under this Paragraph (E) of this Rule and also appears as an asset on an institution's balance sheet, the asset is risk-weighted only under this Paragraph (E) of this Rule, except in the case of loan servicing assets and similar arrangements with embedded recourse obligations or direct credit substitutes. In that case, both the on-balance sheet servicing assets and the related recourse obligations or direct credit substitutes must both be separately risk-weighted and incorporated into the risk-based capital calculation.
9. Alternative Capital Calculation for Small Business Obligations.
a. Definitions. For purposes of this Paragraph (E)(9):
b. Capital and reserve requirements. Notwithstanding the risk-based capital treatment outlined in Paragraph (C)(1)(g) and any other subsection (other than subsection
c. Limit on aggregate amount of recourse. The total outstanding amount of recourse retained by a qualified institution with respect to transfers of small business loans and leases of personal property and included in the risk-weighted assets of the institution as described in Paragraph (E)(9)(b) of this Rule may not exceed 15 percent of the institution's total capital after adjustments and deductions, unless the Banking Board specifies a greater amount by order.
d. Institution that ceases to be qualified or that exceeds aggregate limit. If an institution ceases to be a qualified institution or exceeds the aggregate limit in Paragraph (E)(9)(c) of this Rule, the institution may continue to apply the capital treatment described in Paragraph (E)(9)(b) of this Rule to transfers of small business loans and leases of personal property that occurred when the institution was qualified and did not exceed the limit.
F. Target Ratios 1. As of December 31, 1992:
a. All institutions are expected to maintain a minimum ratio of total capital (after deductions) to risk-weighted assets of 8.0 percent.
b. Tier 2 capital elements qualify as part of an institution's total capital base up to a maximum of 100 percent of that institution's Tier 1 capital.
c. In addition to the standards established by these risk-based capital guidelines, all institutions must maintain a minimum capital-to-total asset ratio, pursuant to the provisions of Banking Board Rule CB101.51.
APPENDIX A MARKET RISK A. Purpose and Applicability.
1. The purpose of this Appendix is to ensure that institutions with significant exposure to market risk maintain adequate capital to support that exposure. This Appendix supplements and adjusts the risk-based capital ratio calculations under this Rule with respect to those institutions.
2. Applicability.
a. This Appendix applies to any institution whose trading activity (on a worldwide consolidated basis) equals:
b. The Banking Board may apply this Appendix to any institution if it deems it necessary or appropriate for safe and sound practices.
c. The Banking Board may exclude any institution otherwise meeting the criteria from Paragraph (A)(2)(a) of this Appendix from coverage under this Appendix if it determines the institution meets such criteria as a consequence of accounting, operational, or similar considerations, and the Banking Board deems it consistent with safe and sound practices.
B. Definitions 1. "Covered position" means all positions in an institution's trading account, and all foreign exchange and commodity positions, whether or not in the trading account. Positions include on-balance sheet assets and liabilities and off-balance sheet items. Securities subject to repurchase and lending agreements are included as if they are still owned by the lender. Asset-backed commercial paper liquidity facilities, in form or in substance, in an institution's trading account are excluded from covered positions, and instead, are subject to the risk-based capital requirements as provided in this Rule. (Subject to supervisory review, an institution may exclude structural positions in foreign currencies from its covered positions.)
2. "Market risk" means the risk of loss resulting from movements in market prices. Market risk consists of general market risk and specific risk components.
a. "General market risk" means changes in the market value of covered positions resulting from broad market movements, such as changes in the general level of interest rates, equity prices, foreign exchange rates, or commodity prices.
b. "Specific risk" means changes in the market value of specific positions due to factors other than broad market movements and includes default and event risk as well as idiosyncratic variations.
3. Tier 1 and Tier 2 capital are defined in Paragraph (C) of this Rule.
4. Tier 3 capital is subordinated debt that is unsecured; is fully paid up; has an original maturity of at least two years; is not redeemable before maturity without prior approval by the Banking Board; includes a lock-in clause precluding payment of either interest or principle (even at maturity) if the payment would cause the issuing institution's risk-based capital ratio to fall or remain below the minimum required under this Rule; and does not contain and is not covered by any covenants, terms, or restrictions that are inconsistent with safe and sound practices.
5. "Value-at-risk (VAR)" means the estimate of the maximum amount that the value of covered positions could decline during a fixed holding period within a stated confidence level, measured pursuant to Paragraph (D) of this Appendix.
C. Adjustments to the Risk-Based Capital Ratio Calculations 1. Risk-based capital ratio denominator. An institution subject to this Appendix shall calculate its risk-based capital ratio denominator as follows:
a. Adjusted risk-weighted assets.
b. Measure for market risk. Calculate the measure for market risk, which equals the sum of the VAR-based capital charge, the specific risk add-on (if any), and the capital charge for de minimus exposures (if any).
c. Market risk equivalent assets. Calculate market risk equivalent assets by multiplying the measure for market risk (as calculated in Paragraph (C)(1)(b) of this Appendix) by 12.5.
d. Denominator calculation. Add market risk equivalent assets (as calculated in Paragraph (C)(1)(c) of this Appendix) to adjusted risk-weighted assets (as calculated in Paragraph (C)(1)(a) of this Appendix). The resulting sum is the institution's risk-based capital ratio denominator.
2. Risk-based capital ratio numerator. An institution subject to this Appendix shall calculate its risk-based capital ratio numerator by allocating capital as follows:
a. Credit risk allocation. Allocate Tier 1 and Tier 2 capital equal to 8.0 percent of adjusted risk-weighted assets (as calculated in Paragraph (C)(1)(a) of this Appendix).
b. Market risk allocation. Allocate Tier 1, Tier 2, and Tier 3 capital equal to the measure for market risk as calculated in Paragraph (C)(1)(b) of this Appendix. The sum of Tier 2 and Tier 3 capital allocated for market risk must not exceed 250 percent of Tier 1 capital allocated for market risk. (This requirement means that Tier 1 capital allocated in this Paragraph must equal at least 28.6 percent of the measure for market risk.)
c. Restrictions.
d. Numerator calculation. Add Tier 1 capital (both allocated and excess), Tier 2 capital (both allocated and excess), and Tier 3 capital (allocated under Paragraph (C)(2)
D. Internal Models 1. General. For risk-based capital purposes, an institution subject to this Appendix must use its internal model to measure its daily VAR, pursuant to the requirements of this Appendix. The Banking Board may permit an institution to use alternative techniques to measure the market risk of de minimus exposures so long as the techniques adequately measure associated market risk.
(An institution's internal model may use any generally accepted measurement techniques, such as variance-covariance models, historical simulations, or Monte Carlo simulations. However, the level of sophistication and accuracy of an institution's internal model must be commensurate with the nature and size of its covered positions. An institution that modifies its existing modeling procedures to comply with the requirements of this Appendix for risk-based capital purposes should, nonetheless, continue to use the internal model it considers most appropriate in evaluating risks for other purposes.) 2. Qualitative requirements. An institution subject to this Appendix must have a risk management system that meets the following minimum qualitative requirements:
a. The institution must have a risk control unit that reports directly to senior management and is independent from business trading units.
b. The institution's internal risk measurement model must be integrated into the daily management process.
c. The institution's policies and procedures must identify, and the institution must conduct, appropriate stress tests and backtests. The institution's policies and procedures must identify the procedures to follow in response to the results of such tests.
d. The institution must conduct independent reviews of its risk measurement and risk management systems at least annually.
3. Market risk factors. The institution's internal model must use risk factors sufficient to measure the market risk inherent in all covered positions. The risk factors must address interest rate risk, equity price risk, foreign exchange rate risk, and commodity price risk. (For material exposures in the major currencies and markets, modeling techniques must capture spread risk and must incorporate enough segments of the yield curve--at least six--to capture differences in volatility and less than perfect correlation of rates along the yield curve.)
4. Quantitative requirements. For regulatory capital purposes, VAR measures must meet the following quantitative requirements:
a. The VAR measures must be calculated on a daily basis using a 99 percent, one-tailed confidence level with a price shock equivalent to a ten (10) business day movement in rates and prices. In order to calculate VAR measures based on a ten (10) day price shock, the institution may either calculate ten (10) day figures directly or convert VAR figures based on holding periods other than ten (10) days to the equivalent of a ten (10) day holding period (for instance, by multiplying a one (1) day VAR measure by the square root of ten).
b. The VAR measures must be based on an historical observation period (or effective observation period for an institution using a weighting scheme or other similar method) of at least one (1) year. The institution must update data sets at least once every three (3) months or more frequently as market conditions warrant.
c. The VAR measurements must include the risks arising from the non-linear price characteristics of options positions and the sensitivity of the market value of the positions to changes in the volatility of the underlying rates or prices. An institution with a large or complex options portfolio must measure the volatility of options positions by different maturities.
d. The VAR measures may incorporate empirical correlations within and across risk categories, provided that the institution's process for measuring correlations is sound. In the event that the VAR measures do not incorporate empirical correlations across risk categories, then the institution must add the separate VAR measures for the four major risk categories to determine its aggregate VAR measure.
5. Backtesting a. Beginning one (1) year after an institution starts to comply with this Appendix, it must conduct backtesting by comparing each of its most recent two hundred fifty (250) business days' actual net trading profit or loss with the corresponding daily VAR measures generated for internal risk measurement purposes and calibrated to a one-day holding period and a 99 percent, one-tailed confidence level. (Actual net trading profits and losses typically include such things as realized and unrealized gains and losses on portfolio positions as well as fee income and commissions associated with trading activities.)
b. Once each quarter, the institution must identify the number of exceptions that is, the number of business days for which the magnitude of the actual daily net trading loss, if any, exceeds the corresponding daily VAR measures.
c. An institution must use the multiplication factor indicated in Table 1 of this Appendix in determining its capital charge for market risk under Paragraph (C)(1)(b)(1)(b) of this Appendix until it obtains the next quarter's backtesting results, unless the Banking Board determines that a different adjustment or other action is appropriate.
TABLE 1 MULTIPLICATION FACTOR BASED ON RESULTS OF BACKTESTING Number of Exceptions MultiplicationFactor 4 or Fewer 3.00 5 3.40 6 3.50 7 3.65 8 3.75 9 3.85 10 or More 4.00 E. Specific Risk 1. Specific risk surcharge. For the purposes of this Paragraph (C)(1)(b)(2) of this Appendix, an institution shall calculate its specific risk surcharge as follows:
a. Internal models that incorporate specific risk.
b. Specific risk surcharge for specific risk not modeled. If an institution does not model specific risk pursuant to Paragraph (E)(1)(a) of this Appendix, then the institution shall calculate its specific risk surcharge using the standard specific risk capital charge pursuant to Paragraph (E)(3) of this Appendix.
2. Covered debt and equity position. If a model includes the specific risk of covered debt positions but not covered equity positions (or vice versa), then the institution may reduce its specific risk charge for the included positions under Paragraph (E)(1)(a)(2) of this Appendix. The specific risk charge for the positions not included equals the standard specific risk capital charge under Paragraph (E)(3) of this Appendix.
3. Standard specific risk capital charge. The standard specific risk capital charge equals the sum of the components for covered debt and equity positions as follows:
a. Covered debt positions
TABLE 2 SPECIFIC RISK WEIGHTING FACTORS FOR COVERED DEBT POSITIONS Category Remaining Maturity Weighting Factor (In (Contractual) Percent)
Government 1 N/A 0.00 Qualifying 2 6 Months or Less 0.25 Over 6 Months to 24 1.00 Months Over 24 Months 1.60 Other 3 N/A 8.00 1 The "government" category includes all debt instruments of central governments of OECD countries (as defined in Paragraph (B) (24) of this Rule) including bonds, Treasury bills, and other short-term instruments, as well as local currency instruments of non- OECD central governments to the extent the institution has liabilities booked in that currency. 2 The "qualifying" category includes debt instruments of United States Government-sponsored agencies (as defined in Paragraph (B)(36) of this Rule), general obligation debt instruments issued by states and other political subdivisions of OECD countries, multilateral development banks, and debt instruments issued by United States depository institutions or OECD-banks that do not qualify as capital of the issuing institution. This category also includes other debt instruments, including corporate debt and revenue instruments issued by states and other political subdivisions of OECD countries that are:
a. Rated investment grade by at least two nationally recognized credit rating services;
b. Rated investment grade by one nationally recognized credit rating agency and not rated less than investment-grade by any other credit rating agency; or c. Unrated, but deemed to be of comparable investment quality by the reporting institution and the issuer has instruments listed on a recognized stock exchange, subject to review by the Banking Board. 3 The "other" category includes debt instruments that are not included in the government or qualifying categories.
b. Covered equity positions
(4) The specific risk capital charge component for covered equity positions is the sum of the weighted values.
F. The Banking Board reserves the authority to modify the application of any provisions in this Appendix to any institution, upon reasonable justification.
TC15 Suspicious Activity Reports [Section 11-109-103, C.R.S.] A. A federally insured state chartered institution shall file with the State Bank Commissioner (Commissioner) a copy of the form filed to report apparent criminal violations, FFIEC Form- Suspicious Activity Report, with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCen) pursuant to 12 U.S.C. 324, 334, et. al. The form shall be filed with the Commissioner within three (3) business days of the filing of said form with the FinCen. The fact that a report is required by this Rule should not in any case deter the institution from first informing the Commissioner by telephone or other expeditious means of an apparent violation when such is deemed fitting.
B. A non-insured state chartered institution shall promptly file with the Commissioner a copy of any criminal referral filed with any state or federal prosecutorial agency. The referral shall be filed with the Commissioner within three (3) business days of the filing of said form with the prosecutorial agency. The fact that a report is required by this Rule should not in any case deter the institution from first informing the Commissioner by telephone or other expeditious means of an apparent violation when such is deemed fitting.
C. Failure to comply with this Rule may result in a levy by the Banking Board of a penalty of up to $25.00 per day for each day the report is not filed.
D. Reference:
1. 12 U.S.C. 324, 334 and 12 U.S.C. 93a are federal statutes granting authority to the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation.
2. This Rule does not include amendments to or editions of the referenced material later than March 2, 2006. Copies of 12 U.S.C. 324, 334 and 12 U.S.C. 93a may be examined at any State Publication Depository.
3. For more detailed information pertaining to this Rule, please contact the Secretary to the Colorado State Banking Board at 1560 Broadway, Suite 1175, Denver, CO 80202, 303- 894-7584.
TC16 Insurance [Section 11-109-104(1)(f), C.R.S.] A. A trust company must, at all times, maintain a surety bond appropriate to the size and scope of the company's business, but in no event in an amount less than $1,000,000. In addition, a trust company must, at all times, maintain a fiduciary errors and omissions insurance policy appropriate to the size and scope of the company's business, but in no event in an amount less than $1, 000, 000. In determining the amount of the surety bond and errors and omissions insurance, the trust company's board of directors shall give due and careful consideration to known elements and factors constituting risk and hazards for the company.
B. Any surety bond or errors and omissions insurance secured by a trust company shall provide that the bonding company providing the bond(s), in the event of cancellation or nonrenewal of such bond(s), will give at least ninety (90) days notice to the trust company and to the State Bank Commissioner.
TC17 Deposit of Securities [Section 11-109-104(1)(a), C.R.S.] A. Purpose. The purpose of this Rule is to protect the Division of Banking against any expense it may incur in liquidating a trust company (nondeposit-taking trust company) when the assets of such trust company available to the Division of Banking for this purpose are insufficient.
B. Definitions: For the purpose of this Rule:
1. "Trust company" shall mean a Colorado trust company that is not authorized to accept or hold savings deposits, time deposits or certificates of deposit pursuant to Section 11-109- 201(1)(d), C.R.S., of the Colorado Banking Code.
2. "Depository trust company" shall mean a Colorado trust company that is authorized to accept and hold savings deposits, time deposits and certificates of deposit and whose deposits are insured by the Federal Deposit Insurance Corporation.
3. "Eligible Securities" shall mean any investment or security that qualifies as Liquid Capital, as that term is defined in Banking Board Rule TC13.5.
4. "Custodian" shall mean any commercial bank, trust company, depository trust company, or other entity approved by the Division of Banking, other than the trust company, for which the eligible securities are being held, approved by the State Bank Commissioner to hold in custody eligible securities.
C. Deposit of Eligible Securities 1. A trust company shall deposit with one or more custodians eligible securities having a market value of not less than $250,000. Eligible securities, even if commingled with other assets of a trust company, shall be deemed by operation of law to be held in trust for the benefit of the Division of Banking in the event of the involuntary liquidation of a trust company. Upon deposit, a trust company shall notify the Division of Banking in writing of the name, address, and telephone number of each custodian and the identity and value of each of the eligible securities deposited with the custodian(s).
2. The Custodial Agreement between a trust company and a custodian holding the eligible securities shall include the following:
3. A trust company shall include with each quarterly Report of Condition filed with the Division of Banking a list of the eligible securities on deposit with its custodian(s), together with the market value of the eligible securities as of the end of such quarter.
4. A trust company may, from time to time, substitute other eligible securities for eligible securities on deposit with its custodian(s) provided that:
a. The market value of the substitute eligible securities will, when added to the value of the remaining eligible securities, equal or exceed the amount of the required deposit;
b. The Division of Banking is given not less than seven (7) days prior written notice identifying the eligible securities and the market value of the eligible securities to be withdrawn from the custodian(s), and listing the eligible securities and the market value of the eligible securities to be substituted therefore; and c. A copy of the notice sent to the Division of Banking is sent to the custodian(s).
D. Priority of division of banking.
In the event of the involuntary liquidation of a trust company, as provided in Sections 11-109-702 and 11-109-704, C.R.S., the custodian(s) shall immediately surrender the eligible securities to the Banking Board; and the Division of Banking shall have a first and prior claim against the eligible securities to satisfy the obligations incurred by the Division of Banking in carrying out its duties and responsibilities under Sections 11-109-702 and 11-109-704, C.R.S. TC18 Investments in Loans [Section 11-109-902(1)(a), C.R.S.] A. Purpose.
The purpose of this Rule is to permit Colorado trust companies that are insured by the Federal Deposit Insurance Corporation to diversify their investment portfolios by purchasing existing commercial loans or participations in existing commercial loans. It does not authorize Colorado trust companies to originate or make commercial loans, consumer loans, mortgage loans, or any other type of loan or to have a direct borrower-lender relationship with any person or business customer.
B. Definitions 1. An "existing commercial loan" means a direct or indirect loan or extension of credit that was made or initiated by a lender or financial institution, other than a Colorado trust company, to a business customer on the basis of any obligation of that customer to repay the funds, or repayable from specific property pledged by or on behalf of the business customer.
2. A "commercial loan" means a direct or indirect loan from a lender or financial institution to a business customer for the purpose of providing funds needed by that customer's business. The term "commercial loan" does not include bankers' acceptances, loans secured by bills of lading or warehouse receipts covering readily marketable securities, or loans to depository institutions, including but not limited to commercial banks, industrial banks, savings and loan associations, credit unions, or trust companies, or to non- depository trust companies.
3. "Business customer" means a corporation, partnership, joint venture, association, business trust, limited liability company, not-for-profit corporation, or similar entity or organization.
C. Purchase of Existing Commercial Loans.
A trust company may invest in existing commercial loans to the same extent that it could acquire or invest in such loans if it were operating as a national bank, subject to the following limitations and conditions:
1. The trust company's capital ratios fall within the adequately capitalized category with a risk- based capital ratio of at least 8 percent, a Tier 1 capital ratio of at least 5 percent, and a leverage ratio of at least 4 percent. The capital ratios are defined in Banking Board Rule TC13-Minimum Capital Ratios, and Banking Board Rule TC14-Risk-Based Capital Definitions and Adequacy.
2. The aggregate of existing commercial loans shall not exceed 50 percent of the trust company's assets.
3. Except where an existing loan is in default, an existing commercial loan shall be maintained and serviced by the originator of the loan or someone acting on behalf of the originator and not by the trust company.
4. Existing commercial loans do not exceed the lending limits contained in this Rule.
5. For all investments in existing commercial loans, a reserve for loan losses shall be established in accordance with the requirements applicable to state chartered commercial banks.
6. Before investing in existing commercial loans, a trust company shall amend its investment policy to include the guidelines and procedures to be utilized by the trust company in acquiring and monitoring such credits.
7. Before investing in existing commercial loans, a trust company shall have an officer qualified by character and experience consistent with the responsibilities and duties relating to investments in commercial loans.
8. A written lending policy, approved by the directors of the trust company, shall provide a foundation for sound portfolio management.
9. Investing in existing commercial loans shall be supervised by the board of directors of the trust company or a committee thereof.
10. The purchase of existing commercial loans from an affiliate shall be subject to the provisions of Sections 23A and 23B of the Federal Reserve Act.
D. Participations.
A trust company may purchase a participation in a loan that qualifies as an existing commercial loan provided that such participation comes within the limitations and conditions set forth in the proceeding Paragraph.
E. Lending Limits.
An existing commercial loan representing obligations of the same obligor or business customer shall not exceed 15 percent of the trust company's total capital.
1. Combining Existing Commercial Loans to Separate Borrowers a. General Rule Existing commercial loans to one person will be attributed to other persons, for the purpose of this Rule, when: (1) the proceeds of such loans or extensions of credit are to be used for the direct benefit of the other person or persons; or (2) a common enterprise is deemed to exist between the persons.
b. Common Enterprise
c. Loans to Corporations
d. Loans to Partnerships, Joint Ventures, and Associations
2. Exceptions to the Lending Limits a. Discount of Commercial Business Paper
b. Loans Secured by U.S. Obligations
c. Loans to or Guaranteed by a Federal Agency
d. Loans Secured by Segregated Deposit Accounts
3. Loans Charged Off in Whole or in Part The lending limits apply to all existing existing commercial loans purchased by the trust company, including such loans that have been charged off on the books of the trust company in whole or in part. Existing commercial loans that have become unenforceable by reason of discharge in bankruptcy or are no longer legally enforceable for other reasons, are not existing commercial loans for purposes of this Rule.
4. Approval by Banking Board Upon application by a trust company to the Banking Board, the Banking Board may allow a trust company to exceed the "lending limits" to purchase a specific existing commercial loan if the trust company proves that such loan will not adversely impact the safe and sound operations of the trust company and the protection of customers of the trust company. In making its decision, the Banking Board shall consider the quality of the existing commercial loans.
The Banking Board shall also have the authority to determine when an existing commercial loan putatively made to a person shall, for the purpose of this Paragraph, be attributed to another person.
TC19 Investment in a Subsidiary [Section 11-109-902(5), C.R.S.] A. General Limitations A trust company may invest in a subsidiary corporation or limited liability company (LLC) that engages in activities in which the parent trust company may engage, subject to the same limitations the parent trust company would be subject to if it were engaged in the activity, provided that the parent trust company holds at least an 80 percent ownership interest in the subsidiary corporation or LLC.
B. Additional Limitations The subsidiary of a trust company may invest in a subsidiary corporation or LLC at less than an 80 percent ownership level provided that each of the following conditions are met:
1. The activities of the subsidiary corporation or LLC in which the investment is made are limited to activities that are part of, or incidental to, the trust company business;
2. The trust company is able to prevent the subsidiary corporation or LLC from engaging in activities that do not meet the foregoing standard;
3. The trust company's loss exposure is limited, as both a legal and accounting matter, and the trust company does not have open-ended liability for the obligations of the subsidiary corporation or LLC; and 4. The investment is convenient or useful to the trust company in carrying out its business and not a mere passive investment unrelated to the trust company's business. TC20 Reports of Condition and Income (Call Report) Filing Requirements [Section 11-109-402(4) (a), C.R.S.] A. Depository Trust Company Requirements The Banking Board hereby authorizes the Colorado Division of Banking to establish a method to obtain all required Call Report information filed by depository trust companies through alternative electronic sources. Beginning with the September 30, 1997 Call Report, depository trust companies may submit Call Report information electronically through a designated third party, pursuant to the filing instructions described in the Colorado Division of Banking's written notice to the trust companies. The standard late filing fees will be imposed if the third party designated to receive the electronic information does not receive the required Call Report data within thirty (30) calendar days after the report date.
B. Non-Depository Trust Company Requirements Non-depository trust companies must file quarterly Reports of Condition and Income (Call Reports) directly with the Colorado Division of Banking in paper form. TC21 Fiduciary Self-Dealing [Section 11-109-103, C.R.S.] A. Unless lawfully authorized by the instrument creating the relationship, by court order or by Colorado law, funds held by a trust company as fiduciary shall not be invested in stock or obligations of, or property acquired from, the trust company or its directors, officers or employees of such affiliates. If the retention of stock or obligations of the trust company or its affiliates is authorized by the instrument creating the relationship, by a court order or by Colorado law, a trust company as fiduciary may exercise rights to purchase its own stock or securities convertible into its own stock when offered pro rate to stockholders. When the exercise of rights or receipt of the stock dividend results in fractional shareholding, additional fractional shares may be purchased to compliment the fractional shares acquired.
B. A trust company may sell assets held by it as fiduciary in one account if the transaction is fair to both accounts and if such transaction is not prohibited by the terms of the governing instrument.
C. A trust company may deposit funds of the estate or trust account as time or demand deposits in its own banking department and may borrow money on behalf of the fiduciary account from itself and may pledge or encumber estate or trust assets as security for such loan, provided such transactions are fair to the fiduciary account.
TC22 Establishment of a Colorado Office Location by a Trust Company Chartered in Another State [Section 11-109-202, C.R.S., et. seq.] A. Definitions For the purposes of this Rule 1. “Home state” means the state where the trust company is chartered.
2. “Home state supervisor” means the state supervisory agency with primary responsibility for chartering and supervising the trust company.
3. “Out-of-state trust company” shall mean any trust company chartered under the laws of another state and domiciled in that state.
4. “Representative trust office” shall have the same meaning as defined at Section 11-109- 101(6), C.R.S.
5. “Trust business” shall have the same meaning as defined at Section 11-109-101(10), C.R.S.
6. “Trust office” shall have the same meaning as defined at Section 11-109-101(13), C.R.S.
B. Establishment of a Representative Trust Office 1. The Banking Board shall issue a certificate of authority to an out-of-state trust company to establish a representative trust office in Colorado upon finding that:
a. The out-of-state trust company is lawfully chartered and operating in good standing in the home state;
b. The out-of-state trust company has the authority to operate a representative office outside of its home state and the establishment of such office has been approved by the applicant’s board of directors;
c. A trust company chartered by, and in good standing with, the Colorado Division of Banking would be allowed by the applicant’s home state supervisor to establish a representative trust office under similar terms and conditions in the applicant’s home state;
d. The applicant’s home state supervisor has entered into a cooperative regulatory and information sharing agreement with the Division of Banking, and/or has entered into the Conference of State Bank Supervisors Nationwide Cooperative Agreement for the Supervision of Multi-State Trust Institutions;
e. The name that the representative trust office is to be operated under is not the same, or deceptively similar to that of an existing Colorado bank, trust company, or industrial bank; and, f. The applicant has certified that a trust business will not be conducted at the representative office.
C. Establishment of a Trust Office 1. The Banking Board shall issue a certificate of authority to an out-of-state trust company to establish a trust office and conduct a trust business in Colorado upon finding that:
a. The out-of-state trust company is lawfully chartered and operating in good standing in the home state;
b. The out-of-state trust company has the authority to operate a trust office outside of its home state and the establishment of such office has been approved by the applicant’s board of directors;
c. A trust company chartered by, and in good standing with, the Colorado Division of Banking would be allowed by the applicant’s home state supervisor to establish a trust office under similar terms and conditions in the applicant’s home state;
d. The applicant’s home state supervisor has entered into a cooperative regulatory and information sharing agreement with the Division of Banking, and/or has entered into the Conference of State Bank Supervisors Nationwide Cooperative Agreement for the Supervision of Multi-State Trust Institutions;
e. The name that the trust office is to be operated under is not the same, or deceptively similar to that of an existing Colorado bank, trust company, or industrial bank;
f. If the applicant proposes to accept deposits, such deposits are insured by the Federal Deposit Insurance Corporation; and, g. The applicant maintains capital at or above the minimum standards as set forth in Banking Board Rule TC13 for depository trust companies, or Banking Board Rule TC13.5 for nondepository trust companies.
D. Certificate of Authority Before a certificate of authority is issued for a representative trust office or trust office, and annually thereafter on or before January 1 of each succeeding year, the out-of-state trust company shall pay to the Colorado Division of Banking a fee in an amount as set by the Banking Board and published in accordance with Banking Board Rule TC4. Each certificate of authority shall expire on January 1 unless the annual fee for the year has been paid prior to such date and the out-of-state trust company certifies in writing that it is, and shall remain, in compliance with the conditions of Paragraph (B) or (C) of this Rule, as applicable.
E. Termination of Certificate of Authority The Commissioner may, upon ten (10) days notice, terminate a certificate of authority if it is determined that the out-of-state trust company is not in compliance with the conditions of Paragraph (B) or (C) of this Rule, as applicable. Within ten (10) days following receipt of the termination notice, the out-of-state trust company may file an application with the Banking Board for hearing to rescind the Commissioner’s determination. _____________________________________________________ Editor’s Notes History Section TC13.5 eff. 7/30/2007.